Senator HATCH. You are saying you don't think it can be done? Secretary BLUMENTHAL. We will certainly work with you in the sense of helping you see the impact of this or that particular approach. Senator HATCH. In addition to working more closely with us, I would encourage you to continue taking an active role in other related matters such as the implementation of a major national health care program. We have 10 percent of our people who are underserved in this area. Not the poor, the rich, or the upper middle class, who are already able to take care of themselves or who are accounted for in some other program, but the lower middle class who can't afford private insurance, who are underserved in this area.

You might also join us in opposing the Davis-Bacon Act which, as a GAO special report, so ably demonstrated, is one of the most highly inflationary acts in Government today. It is a lousy bill, working in direct opposition to our attempt to curb inflation.

There are a number of bills that I think the administration has perhaps gotten behind or at least indicated it might get behind that are highly inflationary, that you could make some great cuts in.

For instance, $3 billion a year on Davis-Bacon, great cuts, some say only $1 billion, but the GAO says $895 million, or something like that. But that is a lot of money if we could cut that out and get more competition in the construction field, better value for the dollar in Federal construction. I think there are a lot of areas like that without cutting in the social areas.

I think these are some of the reasons why the people in this country are so up in arms because the Government, regardless of whether it is the Congress or the administration, because of the very special interest pressures have had difficulties. On the other side of the coin, many of my colleagues would argue that the Pentagon and the military expenditures in this country are out of line.

I don't quite think that is so. But that is my belief and I have voted for some reductions in military expenditures this year and will probably vote for them in the future. But I suspect that this is a widespread pervasive problem that you may want to solve but as important as your position is, because of the conflicts between not just this administration but any administration and the unresponsive Congress that people have gotten fed up to here and are going to do something about it.

There are those who say that if we balance the budget on a regular basis, we may have some tough years, like 1973 through 1976 that you cite in your statement, but over the long run we would be able to get this under control and would be much better off even though we may have some widespread disparities initially. But you are assuming, as does Heller in his arguments against the Roth-Kent bill, that the economy will always remain static rather than dynamic.

I think we have to take those matters into consideration but I also think that, as we have pointed out in the Congress in the last 2 years that the econometric models used by the Budget Committee and by the CBO and by the administrative, have given you due weight to the demand side and no weight at all to the supply side of econometric models. Would you agree with that?

Secretary BLUMENTHAL. I think that may be true. I think that may be true to some extent. I would say that the margin of error in the

econometric models that any of us are working with are probably wider than we realize. Certainly that has been my experience but that is true of both the demand and supply side.

I can't help but mention the fact that last year, and I am sure you were involved in this also, Senator, there was a great deal of debate in the course of the discussion of the tax bill as to the need to reduce capital gains taxes. You will recall that became a very hot item. It was a very, very hot item. I was happy that we supported an approach and that the President signed a bill that has that in it. I think that is good. At that time there were lots of studies that were presented to the Congress by private economists, some of whose findings appeared very congenial to people like yourself, that indicated what would happen to the supply side, what would happen to the stock market, what would happen if these reductions of capital gains taxes were made.

I can't help but indicate, not that I think it was wrong to do so, I think it was right but the fact is that none of that has occurred, at least not up to now. The stock market is going to go up by 40 percent? Nothing like that.

Senator HATCH. It has only been a matter of 6 months.

Secretary BLUMENTHAL. It will shoot up according to some distinguished professors, it was going to shoot up posthaste, and one has to say, I guess one says those econometric models have a large margin of error in them. That applies to the demand projection as well as to the supply.

Senator HATCH. I agree. I think those are important comments but I still think in a number of these economic areas it takes more than 6 months to a year; maybe 3 years

Secretary BLUMENTHAL. We will talk about it next year.
Senator HATCH. I would like that.

Let me ask you this with regard to the constitutional amendment. You have indicated I think strongly that you are disenchanted with these off-budget approaches that the Congress is taking which are really thorny approaches to get around the budget and to make it look like we have larger deficits than we do. This approach may be very dangerous because you have to go into the money markets and find the money anyway.

Let's assume Congress could come up with a balanced budget amendment, though I realize you do not think that possible. What flexibility could we give it? I might be willing to support an amendment requiring only a majority vote and implemented on an annual basis. That lets everybody in this country know who is voting for these deficits. It would be a political amendment that would make it very noticeable as to just what is going on and put some pressures on the Congress to live within certain categories of restraint. That may be just as flexible as what we have now but with political teeth to it, it could help. Do you see what I mean?

Secretary BLUMENTHAL. But you have a majority vote requirement now. There is a majority of Members of Congress who are now voting for the budget.

Senator HATCH. But we may vote 400 times on the budget in the year rather than once. I am talking about bringing it down to one big vote at the end of the year, fifth concurrent resolution, whatever

it is. Let everybody know who is voting to break the budget and who isn't. I think that might be a worthwhile consideration. In any event, the question is, would you agree, and categorically recommend assuming we can come up with some reasonable flexible balance the budget amendment, that we get rid of the off-budget items or at least that they have to be reported in the normal budgetary process? Secretary BLUMENTHAL. I think, regardless of what happens on the balanced budget approach, we need to be sure that the off-budget items are brought under control and reduced as much as possible. There is an effort going on within the administration, the executive branch, to do this. We have an intention to reduce it gradually.

I think that is very necessary and very important and the more we can do that, the better off we will be.

Senator HATCH. So your recommendation to the Congress whether or not we have a constitutional amendment with regard to this is let's do something about the evasion of the budget process that is presently going on with the off-budget items?

Secretary BLUMENTHAL. We have to be careful. There are clearly some items that are quite different than the normal budget items. I am referring, for example, to the present situation where appropriations for one area I followed closely, the Multilateral Development Bank, our participation in the World Bank and Regional Development Banks, where most of that is capital which we have never been called on ever since these banks were first started after the Second World War, would only be called on in the event of default, which is highly unlikely, where in fact these banks go out into the private markets not in the United States but outside the United States to raise that money and yet our participation in them, including the callable capital, which may be 95 percent of the total, is fully appropriated; authorized. There you get into distortions. In other words, you are presenting to the public the picture of spending that is really different from the real thing. I think you need to have such distinctions in mind. You need to have congressional control over that. You need to have it carefully managed, but maybe you need a somewhat different approach to that.

A lot of these off-budget items and loan programs can becomedo at various times-become an evasion. That needs to be handled. Senator HATCH. You have indicated in your testimony that the congressional budget process established in 1974 has made a major contribution toward bringing about comprehensive logical and responsible budget changing.

With all due respect for your viewpoint on this matter, I would suggest that it may be at variance with the popular perception of this process. Since the Budget Act was implemented in fiscal year 1976, this Nation has incurred an additional $300 billion in national debt. That is nearly 40 percent of the total national debt. I think this is one of the major problems. Although I think the committee has some merit. I am not certain it is serving the purpose for which it was created as too many votes are done in a partisan manner. In fact, it has tended to increase spending rather than curb it. With the deficits we have had I am not convinced that the budget process is working.

Secretary BLUMENTHAL. I think it can be improved. First of all, I would say in all fairness one should not indict this congressional

budget process just because it came into being in 1976. That is a bad base period to use. The cause and effect there are not that clear.

Second, I must say that those of us who are really working on the budget, the Director of OMB and the Secretary of the Treasury, are in the forefront of this, admire the work which Senator Muskie and Senator Bellmon are doing. I would say they are, they and many of the members of these committees also in the House, Chairman Giaimo, become tremendous allies of ours in getting some responsibility into this thing, being the voice of sanity, adding up the numbers and seeing where it leads within the Congress.

You may want to go further in that regard; you may want to tighten it or sharpen it based on your experience. But I would say that imagine what it was like-no doubt you can imagine-before that existed. It really was worse because now at least you have a Senator Bellmon and a Senator Muskie and a Chairman Giaimo, and others who can say that is outside the budget, that is outside what we agreed to, to keep some control.

Senator HATCH. There is a lot of truth to that. I might add, however, that the philosophical tone of the majority of committee members is Keynesian in nature, so deficits are not necessarily viewed as a negative aspect. Then too, when there are deficits to account for, they simply invade the premises with Keynesian experts to justify them. Before the creation of the committee this was never done. Then the committee says that there is nothing we can do about this; we have to do this because it is good economics. I have heard that argument many times on the Budget Committee, on the floor, et cetera. I am not sure the committee even realizes what has happened.

It worries me. I agree with you. I think there is an intensive effort by the ranking and minority Members to do a good job, but they are doing it within the mentioned philosophical framework which has a wide variance of accuracy with respect to economics.

Secretary BLUMENTHAL. Can't you use your influence?
Senator HATCH. It is almost as bad as lawyers.

Secretary BLUMENTHAL. Can't you use your influence to get a balanced group of experts to advise them?

Senator HATCH. We have tried.

Secretary BLUMENTHAL. There is nothing ordained that you have to be a card-carrying Keynesian in order to advise that committee. Senator HATCH. Maybe you should come up and sit with us on the Budget Committee and see how many card-carrying Keynesians come in.

Secretary BLUMENTHAL. I am not one of them. I would be happy to do it.

Senator HATCH. I am not so sure that is so. I do have a great deal of respect for you. I have appreciated your testimony here today and I do appreciate the efforts that you make. Some of them have caused you some bloody noses, I know, and have been very difficult in your tenure, but I appreciate it and enjoyed listening to you.

Secretary BLUMENTHAL. Thank you.

Senator SIMPSON. I found in my term here, Mr. Secretary, that if the chairman disappears, get in your licks quick. [Laughter.] Senator Bayh has been very kind to me.

Senator HATCH. Would you yield for 1 second?

Senator SIMPSON. Just 1.

Senator HATCH. Senator Dole asked that in his absence we put his statement in the record at the beginning of the proceedings. Thank you.

Senator SIMPSON. Let me just ask a few questions, if I might, before Senator DeConcini stops me.

I was interested in your comment a moment ago about the balanced group of experts. In my time, I have come to find that all experts are unbalanced.

I admire your efforts very much, and it is a privilege to hear you testify. I have read your remarks. I know your great frustration as a businessman, coming into this administration. I have read some very interesting articles concerning that-very excellent pieces.

I have observed that there is a commonly held belief that the balanced budget movement is the simplistic approach, a totally simplistic approach. In the chambers of academia, it is like the reference that the boobs are stirring out there. There is a feeling there, a sense like that.

It seems to me that what we are doing is somethat misreading the issues. The feeling of the people say in Dubuque, Iowa, or Cheyenne, Wyo., is that they have to balance the budget for their own families, so why in the world can it not be done in the Federal Congress? Even though econometric models really kind of leave me in a flux state, to the people of America, mathematics at least is a clear discipline; that is, if you blow more than you make, you go broke. They have got that figured out. It comes right down to that, and that is something they can understand without any high degree of intellect.

I am convinced that scorn-this is not addressed to you, sir-but that scorn and belittling of the balanced budget effort is poor ammunition to fight it off. You referred to President Kennedy and his remark that economic solutions require hard thought, not automatic responses. I think that is where we are. We are here in the arena of hard thought, trying to do something in that way.

One of the things that has disturbed me as a new boy on the block and observer of the scene is that I find this punitive attitude expressed, something akin to: We will show you if you continue to stir around out there like you are doing; we are going to show you a trick or two; we are going to take away your revenue sharing; we are going to take away your Federal aid, Federal money. Those threats are made, and it seems curious to me that the threateners forget where the funds came from. They came from the people and not from the Congress. I must admit I get a charge out of the phrase "fine tuning" around here, that if we will just lay off, please, that we will have a fine tuning effort and correct all our economic problems. As I perceive it, this "fine tuning" is like playing the organ with boxing gloves.

I think that really there is a total lack of self-discipline by this Congress including by this Congressman, I want to make that clear. I believe that we will never get a balanced budget here because one man's junk is another man's treasure in this agency of government. But the immediate question comes from what I see as a misreading of the mood of America-the feeling that the balanced budget movement will simply "go away." Mr. Secretary, if the 34 States did actually pass the constitutional amendment, where would we go from