The impact of this on the federal budget is obvious—a given set of tax rates will reduce tax collections. If you have an income tax, and incomes fall, then tax revenues fall off. Now if you have a requirement that you must always balance the budget, the immediate response is to raise taxes or to cut government expenditures in order to bring the budget back into balance. But the impact of increasing taxes is to suck money out of the economy. The impact of reducing expenditures is to reduce the flow of money into the economy. In both cases, the effect of the balanced budget response is to aggravate the recession. Of course, once you have aggravated the recession, it comes back to haunt you again. Income is lower, and the given tax rates are again bringing in lower levels of revenue. So you again raise taxes or again cut expenditures-and you again reduce incomes and reduce employment and increase unemployment.

Now that is a sure-fire formula for converting a recession into a depression. It's been tried, and it works. The last President of the United States who tried it was Herbert Hoover. We had the beginnings of a very serious recession-even a small depression-stemming from the stock market crash of 1929 and growing worse in 1930. President Hoover went to the Congress in 1931 and he proposedin the face of a growing budget deficit-to balance the budget. He proposed to raise taxes. He said it was "indispensable to the restoration of confidence" and therefore had to be done. A newly elected Democratic Congress went along with President Hoover and passed the tax increase.

The impact, of course, was to take more money out of an already weak economy and to increase the level of unemployment to the point where by the time Hoover left office-it had reached 25 percent of the work force. Many of the workers ended up on the streets, because they couldn't make their mortgage payments, and they lost their homes. They ended up going to empty lots and building shacks out of scrap pieces of cardboard or wood or tar paper. When enough of these shacks grew up together in one area they were called Hoovervilles. Ironically, that is probably the most important legacy in the national memory that President Hoover left with us.

Here is what he said in explaining this to the American people:

"What we most urgently need today is more spending money in your pockets rather than in the Treasury of Washington. Let's face it: the tax cut to bolster the economy will mean a bigger federal deficit temporarily, and I have fought against deficits all my public life, but unless our economy revives rapidly Federal tax revenues will shrink so much that future deficits will be even larger."

Now the tax cut was enacted. It came perhaps too late and too little to avert a recession, but at least it was there underpinning demand in the economy. We did not move back to a Great Depression, 1930s style, but in fact have been able to recover largely from that recession today.

We should be able to learn from history like this. But a few decades later we have as many as 30 states that have mindlessly proposed an amendment to the Constitution which, in some versions, would guarantee a reenactment of the kinds of policies that were so disastrous for the United States in the early 1930s.

Let's look at the economics profession. There is an old story that if every economist in the country were laid end to end, they would still disagree. But, in fact, Mr. Chairman, it's an interesting fact that on the issue of the balancedbudget amendment they do not disagree. There are almost no reputable economists in this country who have supported this proposal. I'm talking not just about liberal economists like Walter Heller. Walter Heller has said this amendment would be "highly dangerous-dangerous to the jobs of American workers and dangerous to the strength of the American economy." I'm talking about the conservatives as well-the Herbert Steins and the Milton Friedmans.

Alan Greenspan is perhaps the most_conservative man who ever served as Chairman of the President's Council of Economic Advisers. I don't know where he stands today. But he was asked about this amendment earlier this year and he said very simply, "I must sympathize with the goal of such an amendment. But I must conclude that balancing the budget-year in, year out-is technically infeasible. I do not really know any responsible economist who would see it otherwise."

Particular theories of how our economy should be managed should not be frozen into the Constitution. As Justice Holmes said many decades ago, "Constitutions are intended to preserve practical and substantial rights. A constitution is not intended to embody a particular economic theory." To that we can only add that the last economic theory that should be embodied is the theory that the Federal budget should be balanced every year. That would be to invite economic and political disaster. The Federal Constitution is a document which has to serve

us year in and year out. It cannot be a vehicle for putting our national economy in a straightjacket of the sort that was so harmful in the 1920s and early 1930s. Thank you very much.

U.S. PRESIDENTS ON THE BALANCED Budget

Since the time of Herbert Hoover, each American President has made efforts to balance the Federal budget-with great success in some cases, with little success in others. But each President has tried to avoid the mistake of the Hoover Administration of trying to balance a budget that was thrown into deficit by a significant decline in the economy. Each has recognized that such action would only aggravate the decline.

When President Franklin Roosevelt looked back over four years of recovery from the depths of the Depression, he argued that to have balanced the federal budget "in 1933 or 1934 or 1935 would have been a crime against the American people." His policy had been to increase federal expenditures "to restore the purchasing power of the American people " since "only that will put America back to work." Budget deficits were helping to restore prosperity, which would eventually generate higher tax collection, he said. "It is the deficit of today which is making possible the surplus of tomorrow."

After World War II, Harry Truman became President. The economy was indeed more prosperous, and his budgets were generally able to show surpluses. Early in 1949, President Truman even proposed an increase in tax rates to reduce an impending deficit. Before Congress could act, however, demand in the economy turned down and unemployment increased sharply. Truman then withdrew his proposal. "Today, because profits and incomes have fallen, taxes bring in less money" and the deficit was growing. But, he warned, “An increase in taxes now might bear too heavily on business and discourage the investment necessary to full production and full employment." Truman concluded: "I do not like to have a Government deficit. But still less do I want to injure the economic health of the country. You cannot achieve a surplus when you have a declining national economy." The economy quickly recovered, tax revenues increased, and the budget again went into surplus.

President Dwight Eisenhower argued that "it is rather a good thing to be a bit frugal and say that we can live within our income." But, he went on, "it has sometimes seemed a little bit odd that we have to make our whole economic cycle coincide with the time it takes the earth to get around the sun. I sometimes wonder whether we shouldn't think of our budget balancing in terms of 5-year terms, or at least to include the length of time that we find the ordinary business cycle... One year's budget is not the whole answer.'

President John Kennedy called on the country to reject the "old and automatic cliche that deficits automatically bring inflation." Depending on the condition of the economy, "Deficits are sometimes dangerous-and so are surpluses." When the economy was recovering too slowly from the recession that began in 1960, President Kennedy in 1962 proposed a tax cut even though it would temporarily increase the budget deficit. He wanted to "give this economy sufficient stimulus to move it ahead and not have a recession in 1963." Kennedy recognized that budget deficits are largely caused "by slow economic growth and periodic recessions." Therefore, "only full employment can balance the budget, and the reduction can pave the way to that employment" even if it created a temporary budget deficit. The tax cut proposed by President Kennedy was enacted under President Lyndon Johnson. It helped initiate the longest period prosperity in our nation's history. President Johnson looked back and argued that it would have been "self-defeating" to have tried "to balance our budget too quickly in an economy operating well below its potential."

Another recession began in 1970 and deepened in 1971, and again the budget went into deficit. President Richard Nixon did not seek to erase the deficit immediately. Rather, he proposed expenditure increases and tax reductions to reduce unemployment: "Six percent unemployment is too much, and I am determined to reduce that number significantly in 1972." He said of his efforts to increase the deficit, "This is strong medicine, and I do not propose to continue its use, but we have taken it in order to give powerful stimulus to employment."

Another recession began in late 1974, and the federal deficit grew above $30 billion. President Gerald Ford quickly proposed a tax cut. As he explained to the American people: "What we most urgently need today is more spending money in your pockets rather than in the Treasury in Washington. Let's face it, a tax cut to bolster the economy will mean a bigger federal deficit temporarily, and I

have fought against deficits all my public life. But unless our economy revives rapidly, federal tax revenues will shrink so much that future deficits will be even larger." The actual cut came too late to prevent a substantial increase in unemployment-but, the economy turned around and a full-scale depression was prevented.

Senator BAYH. Our next witness is Mr. Allan Grant, president of the American Farm Bureau Federation.

Mr. Grant, it is good to have you with us this morning.

TESTIMONY OF ALLAN GRANT, PRESIDENT, AMERICAN
FARM BUREAU FEDERATION

Mr. GRANT. Thank you, Mr. Chairman. My name is Allan Grant. I am a farmer from California and president of the American Farm Bureau Federation.

The American Farm Bureau Federation is the Nation's largest general farm organization, and we appreciate the opportunity to present our views on proposals for constitutional amendments to limit Federal spending and balance the Federal budget. We can think of no issue that is more important to the average citizen or to the future growth of this Nation.

Federal spending has been growing at a rate which, in our opinion, is clearly excessive in terms of the taxpayers' ability to pay. This excessive growth has had, and is continuing to have, adverse consequences for our economy and for individuals. This is particularly true for farmers and ranchers who are faced with rising costs of production and relatively low rates of return for their labor, management, and invested capital. Federal spending has financed the overregulation of business activities, reduced individual work incentives and productivity, increased the real burden of Federal taxes, and led to continuing Federal deficits which have fueled an inflation that threatens the future of our private enterprise system.

The Federal budget was last balanced in fiscal 1969. The cumulative Federal deficit for the fiscal years 1970-79 is currently estimated at $320.6 billion. This is a record of fiscal irresponsibility, and the result has been a serious inflation which is getting worse.

Quite aside from the fact that deficit spending has fueled a rate of inflation which is now approaching 14 percent annually, we think that the Federal Government is preempting too much of our gross national product. Federal expenditures rose from 20.1 percent of GNP in calendar 1969 to 23.3 percent in 1975, and then fell back to 21.9 percent in 1978. While the fact that there has been a reduction in the Federal share of GNP since 1975 is encouraging, we think that the Federal share is still too high.

Farm Bureau has long been on record in favor of fiscal responsibility. We supported the Congressional Budget and Impoundment Control Act of 1974. This act has had a constructive effect on congressional consideration of the President's budget, but it has not forced the Congress to face up to the fundamental fact that the ability and willingness of the taxpayers to finance Federal expenditures is not unlimited. Something more is needed. As a minimum, effective action should be taken as soon as possible to prevent the Federal share of GNP from rising above its present level at some future time.

Farm Bureau policies for 1979 call for constitutional amendments, both to require the Congress to operate on a balanced budget each year and to restrict the spending authority of the Federal Government to a realistic percentage of the gross national product. We interpret this to mean that Farm Bureau can support either a balanced budget amendment, a spending limitation amendment, or some combination of these two alternatives. Our objective is greater fiscal responsibility, and we will support any proposal that moves toward this objective. If a choice has to be made between a balanced budget and a spending limitation amendment, we prefer a spending limitation such as that proposed by Senate Joint Resolution 56, and introduced by Senators John Heinz of Pennsylvania and Richard Stone of Florida. While a balanced budget is a highly desirable objective, which the Congress and the administration should seek to achieve as often as possible, we recognize that an amendment which required the Congress to balance the budget without observing a limit on spending would not necessarily slow the growth of the Federal Government. The budget could be balanced by increasing taxes. There is also a possibility that a balanced budget amendment could be evaded by changes in congressional procedures and bookkeeping practices. The spending limitation approach recognizes the need to encourage private incentives by putting a ceiling on the percentage of our gross national product that can be spent by the Federal Government. If this can be done, it will be much easier to balance the budget in future years than it has been in the recent past.

The provisions of Senate Joint Resolution 56 have been carefully designed to establish a meaningful limit on Federal spending without either disrupting existing Federal programs or penalizing State and local governments. This resolution is the outgrowth of the work of a group of citizens known as the National Tax Limitation Committee. As president of the American Farm Bureau Federation, I served as a member of this committee, along with the eminent economist, Dr. Milton Friedman, and a number of other individuals who are concerned about the integrity of our economy and Government.

The consensus of the committee was that the proposed amendment should limit Federal expenditures-more specifically, total Federal outlays which are generally defined as payments made by the issuance of checks or the disbursement of cash.

The proposed amendment would not require cutbacks in existing Federal programs. Under the committee's proposal, and Senate Joint Resolution 56, total outlays of the Federal Government each fiscal year would be limited to the amount spent in the previous fiscal year plus the percentage increase in gross national product in the most recent calendar year. This formula would not require an immediate reduction in the percentage of GNP that can be spent by the Federal Government. It would, however, make it possible for the Congress to reduce this percentage on a gradual basis. For example, if Congress held Federal spending below the applicable limit for a fiscal year, this lower level of spending would become the base for determining the spending ceiling for the next fiscal year.

The proposed amendment would encourage Congress to balance the budget. If the inflation rate in any calendar year was more than 3 percent, the permissible percentage increase in total outlays would be

reduced by one-fourth of the excess of the inflation rate over 3 percent. The purpose of this provision is to encourage the Congress to bring inflation under control by imposing a penalty if it fails to do so.

The proposed amendment would not impair the ability of the Federal Government to deal with emergencies. Following the declaration of an emergency by the President, the Congress, by a two-thirds vote of both Houses, would be permitted to authorize a specified amount of emergency outlays in excess of the limit for the then current fiscal year. Emergency outlays authorized under this procedure would be excluded from the base figures used to determine future limitations on spending; however, the limitation on total outlays could be changed by a three-fourths vote of both Houses of the Congress.

Total outlays, as defined in Senate Joint Resolution 56, include both budget and off-budget outlays but do not include redemptions of the Federal debt of emergency outlays. If total revenues received by the Federal Government exceed total outlays during any fiscal year the surplus would be used to reduce the Federal debt until it is eliminated. The proposed amendment would not penalize State and local governments. Total grants to State and local governments in each of the first 6 fiscal years after ratification of the proposed amendment are not to be a smaller fraction of total outlays than in the 3 fiscal years prior to ratification. Thereafter, if grants are less than that fraction of total outlays the limitation on total outlays is to be reduced by an equivalent amount. In addition, the Federal Government would be prohibited from requiring, directly or indirectly, that the State or local governments engage in additional programs or services without compensation for additional costs.

Approximately 200 proposals designed to restore fiscal responsibility in Government are now before the Congress. Farm Bureau believes that the proposal offered by Senator Heinz and Senator Stone, Senate Joint Resolution 56, represents a practical and workable solution to a very serious problem. We commend it to your favorable consideration.

Senator BAYH. Thank you very much, Mr. Grant. I appreciate your testimony and your being here.

Senator Thurmond has a conflict requiring him to leave shortly. If there is no objection from my colleague, I will yield to Senator Thurmond.

Senator THURMOND. Thank you very much, Mr. Chairman.

Mr. Grant, we are very pleased to have you here. I have a very high regard for the Farm Bureau. In fact, I have been a member of it for about 27 years, and I think they do great work.

I believe you stated that the Farm Bureau has called for both a balanced budget amendment and a limitation on Federal spending. Although you suggest a spending limitation, I presume the Farm Bureau will still support a balanced budget amendment.

Mr. GRANT. Yes; we will. We have been in that position for years. Senator THURMOND. If we were to apply a spending limitation instead of pursuing the balanced budget procedure, do you think we would have a balanced budget?

Mr. GRANT. Eventually the Congress would bring that about by the formula.

Senator THURMOND. If Federal spending could grow at the same rate of gross national product and the base year was a year of deficit