American people to put a lid on our soaring national debt. The argument is over how to accomplish this goal.

I am the first to admit that the preferred method of balancing the budget is through the legislative process, by the judicious consideration and approval of annual appropriation measures which would not permit spending to exceed revenue. Regrettably, after observing Congress at work for nearly seven years, I am convinced that unless there is some constitutional discipline imposed, there will never be a year-in-year-out policy of fiscal prudence.

Consider the action of the Senate earlier this year. During the deliberations on the first concurrent budget resolution, several amendments were offered which would have helped insure a balanced budget in 1981. These amendments would have cut fiscal year 1980 spending below the level recommended by the Budget Committee and would also have provided for a possible 1981 tax cut while achieving a 1981 balanced budget.

The first of these, the Roth Amendment, would have cut an additional $10 billion in Federal spending in fiscal year 1980 and also allowed tax cuts in 1981. The Domenici amendment would have reduced the President's budget by $10 billion and reduced the Budget Committee's projected budget by $8 billion. The Schweiker amendment would have limited the growth in Federal spending to the rate of inflation for 3 years, thereby producing a balanced budget in 1981. This amendment would have provided substantial tax cuts in both fiscal year 1981 and fiscal year 1982.

All three amendments would have allowed a balanced budget in 1981 and provided room for tax cuts as well. Unfortunately, all three failed.

Members had still another opportunity to demonstrate to their constituents that they were indeed serious about balancing the budget. During the final deliberations on the tax cut bill last October, Senators Chiles and Bellmon joined me in offering an amendment which would have, for the first time in American history, linked tax cuts directly to restraints in federal spending. The proposal called for a tax cut over the next five years contingent upon three developments: (1) federal spending would grow no more than 1 percent a year after adjustment for inflation; (2) outlays would drop from 21.5 percent of GNP to 19.5 percent of GNP in 1983; and (3) the tax cut scheduled for 1982 would depend on the administration's achieving a balanced budget for that year.

This proposal provided Congress an opportunity to implement a policy that would lower taxes without increased inflation, reduce the growth rate of Federal spending, provide for a balanced budget, and stimulate sound and stable private sector growth.

The measure was approved by a 65-20 vote in the Senate, by a 268-135 vote in the House, clearly indicating that Members of Congress were beginning to get the message from their constituents.

Unfortunately, House-Senate conferees did not adopt the proposal. Rather, they added the language of the amendment to the tax cut bill as a statement of principles. The American people lost again.

All attempts in recent years to balance the Federal budget have met the same fate-rejection. The most distressing fact to me is that we have become content to have an unbalanced budget in good times as well as in bad times. The discussion in Congress centers each year on the size of the deficit rather than its elimination. Deficit spending must be accompanied by one of two things: either an expansion of the money supply, or the Treasury borrowing money from the private capital market. Thus, as a consequence of increasing deficit spending, the Federal Government currently monopolizes two-thirds of the available capital in our economy. This, in turn, drives up interest rates and dries up needed investment capital for American agriculture and business. Ironically, the excessive deficit spending which is supposed to cure such economic ills as high unemployment instead operates to hamper economic activity. This process drastically limits the amount of lendable funds available for the use of the private sector of our economy to increase productivity and thereby ease inflation and unemployment.

The willingness by the executive and legislative branches to accept deficits has been the single most important factor in the ever increasing spending by the Federal Government, where it has been politically expedient to increase spending without attempting to pay for the programs through increased revenue.

Historically, Congress has allowed spending priorities to be determined by the pressures of the moment. Taxes have not been increased sufficiently to cover the costs, both because of political pressures and because of the knowledge that increases in taxes large enough to cover the costs of the multitude of Government

programs would surely destroy the workingman's will to work and the incentives for American businesses to produce and expand.

In my opinion, deficit spending can be cured only by the creation of a rule which forces the Government to face its responsibility to balance the Federal budget. The discipline imposed by this simple requirement can operate effectively only if it is imposed by the supreme law of the land: the U.S. Constitution. In order to insulate the Federal budgetary process from political pressures, a clear and binding standard mandating the fiscal integrity of the Federal Government is needed.

Mr. Chairman, the American people believe in the basic economic principle embodied in this resolution and they will not let this issue fade away quietly. Neither will they judge kindly, in my opinion, those who shrink from their responsibility to restore fiscal integrity to the Federal budgetary process.

There are those who argue that the amendment proposed would put the budget in a fiscal straight-jacket. Admittedly, a simple constitutional amendment calling for a balanced budget would be too restrictive, but this resolution calls for a balanced budget except in times of national emergency. In other words, this proposal grants the President and the Congress flexibility to act responsibly in times of economic necessity; e.g., stimulating the economy during a recession or mobilizing the country during a military emergency.

Following the passage of proposition 13 in California in June of 1978, eight States approved resolutions calling for a constitutional convention to consider an amendment requiring a balanced Federal budget. Today, 30 of the needed 34 States have approved such measures. I would prefer that this matter be addressed by a two-thirds vote of the House and Senate, rather than by a constitutional convention with its inherent dangers. It is my belief that with each new State added to those calling for a constitutional convention comes additional pressure on Congress to adopt the type of resolution I am advocating today. Ultimately, this proposal should be given to the States to decide whether or not to ratify. I am not wedded to every period and comma of this resolution. If the committee feels that some constructive amendment is necessary, I am certainly willing to look at it carefully and work with you in that regard.

It is my view, Mr. Chairman, that this resolution permits Congress to finish what it started in 1974 when Congress passed the Congressional Budget and Impoundment Control Act. For the first time, meaningful machinery for the formulation and implementation of a rational and economically sound Federal budget became available to the congressional branch of Government. The passage of the constitutional amendment proposal which is being considered today is the next logical step in implementing the machinery to make a balanced Federal. budget a reality.

It is important to note that this amendment will take some time to become the law of the land. As it moves toward ratification, I hope the Congress, through the Budget Committees, will move toward the level of fiscal integrity which this resolution requires.

Finally, let me say that this resolution gives the American people a clear opportunity to express through their representatives their support for fiscal responsibility at the Federal level. It enables the people to express themselves in the strongest possible terms, as an amendment to the Constitution, that they want to bar further Federal budget deficits.

[The subcommittee was recessed at 2:57 p.m., to reconvene subject: to the call of the Chair.]

PROPOSED CONSTITUTIONAL AMENDMENT TO

BALANCE THE FEDERAL BUDGET

THURSDAY, OCTOBER 4, 1979

U.S. SENATE,

SUBCOMMITTEE ON THE CONSTITUTION

OF THE COMMITTEE ON THE JUDICIARY,

Washington, D.C. The subcommittee met, pursuant to notice, at 9:43 a.m., in room 1202, Dirksen Senate Office Building, Hon. Birch Bayh (chairman) presiding.

Present: Senators Bayh, Thurmond, and Hatch.

Staff present: Majority-Kevin O. Faley, chief counsel and executive director; Mary K. Jolly, staff director and counsel; Linda RogersKingsbury, chief clerk and deputy staff director; Christie F. Johnson, assistant clerk; John Minor, counsel to Senator Kennedy; Richard F. Allen, legislative assistant to Senator Heflin.

Minority Steve Markman, general counsel to Senator Hatch; Dennis Shedd, counsel to Senator Thurmond; Chip Wood, counsel to Senator Simpson.

Senator BAYH. We will ask our committee to come to order.

Today the Subcommittee on the Constitution holds its fourth day of public hearings on the various proposals introduced in the Senate that seek to amend the Constitution to require a Federal budget balanced annually or a limitation on Federal expenditures.

All of us are deeply concerned about the inflationary pressures that confront our country. We are aware there are no simple solutions to these problems, although some might like to feel that there was. We are aware of the tremendous increase in the cost of living as a result of OPEC oil, which has had a ripple effect across the country, and we also are cognizant of the fact that Federal expenditure plays some role in this overall financial picture.

We have been moving, I think, rather dedicatedly in a responsible course, through the budget process, to pay much more attention to spending than we ever have in the past. I know the Subcommittee on Transportation, Committee on Appropriations, that I have the good fortune to chair, has taken a much more careful look at some of the expenditures in the area of transportation over the last couple of years than was generally the pattern.

Our purpose for holding these hearings is to see whether it makes any sense to use a constitutional amendment as a budget-balancing process; are there better ways; what are the pluses and minuses of the suggestion of the constitutional amendment?

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We are fortunate this morning in having a series of witnesses, some for and some against this particular proposal.

Before introducing our first witness I would like to submit, without objection, the statements of Senator Dole and Senator Cochran. [The statements follow:]

PREPARED STATEMENT OF SENATOR BOB DOLE, A U.S. SENATOR FROM THE STATE OF KANSAS

Mr. Chairman, I am pleased to have the opportunity to once again urge this distinguished subcommittee to act on the proposed amendments to the constitution that would mandate a balanced budget. Last March 1 had the honor of testifying to the subcommittee in behalf of the amendment that I have introduced, Senate Joint Resolution 5. This amendment has the virtue of combining & spending limitation with the requirement for a balanced budget. It also allows Congress essential flexibility by allowing a budget deficit if so voted by two-thirds of both Houses of Congress, except that a deficit may be incurred only 4 out of every 9 years. Any such deficit must be repaid within 4 years. Finally, over a 3-year period, Senate Joint Resolution 5 would reduce the taxing and spending authority of the Federal Government to a limit of 18 percent of gross national product.

I do not need to reiterate at this time the reasons that make it imperative that we impose firm institutional restraints on the Federal budget and Federal spending. I would like to make two points. The first is that, while these further hearings are welcome, it has been nearly 7 months since I testified on this subject, along with many very distinguished witnesses. Yet in that span of time no further action has been taken on these proposed amendments. Given the strength of public support for a balanced budget amendment and the number of States that have petitioned for a constitutional convention on the matter, I think this record is unfortunate and, indeed, unacceptable to the American people. I urge the subcommittee to act on the proposals before it, and I will gladly listen to any advice the members may have as to how the proponents of balanced budget amendments can expedite this matter.

My second point is this: Despite the improvements in budget control made by the congressional budget process, an overriding institutional restraint on the budget is required. The recent extended dispute over the second budget resolution dramatizes this fact, and the rate of inflation gives even more dramatic evidence. We need a mandate to end deficit spending so that we can contend with conflicting political pressures for more spending programs. I have raised this point often before, and I think it is the fundamental, the most compelling argument in favor of a balanced budget amendment. I would just like to note that in the October 3 Wall Street Journal there appeared a very thoughtful article on this question by Mr. J. B. Burnham, vice president of Mellon Bank N.A. I commend Mr. Burn ham's article to the attention of my colleagues on the subcommittee, and I ask that it be inserted in the record at this point.

For the reasons discussed above, I urge the subcommittee to act on a balanced budget amendment, and I thank the members of the subcommittee for their attention to this question.

[Wall Street Journal, Wednesday, October 3, 1979]

THE BREAKDOWN OF RESTRAINT

(By J. B. Burnham)

"The fight against inflation becomes nearly impossible when the pressures of special economic interest groups are successful. These lobbies care absolutely nothing about the national interest- -so long as they get theirs ***.

"*** I will not permit any more expansion in beef imports this year. I will not permit unrestricted beef imports next year."

COLUMBIA, Mo., August 14, 1978.

JIMMY CARTER,

Several years ago, an authoritative academic paper surveying research on infla tion quickly came to a disturbing conclusion. Although the literature reviewed had a great deal to say about the behavior of prices and wages, and about the impacts of fiscal and monetary policy, it did not have "a great deal to say about

why the particular policies which so often lead to inflation are pursued." In short, there was no significant body of contemporary literature on the "political economy" of inflation.

A BROADER VIEW

In view of the dismal record of price advances over the past 25 years, perhaps it is time for economists and other social scientists to take a somewhat broader view of the world around them.

That record, as the accompanying chart shows, suggests a gradual acceleration of inflationary pressures in the United States, along with occasional periods of relative moderation, all of which are closely associated with a business downturn. Most alarming of all, the "floor" rate of inflation after each recession has moved progressively higher with each business cycle.

In retrospect, it is clear that price pressures of the past two decades associated with the Vietnam war, world-wide crop failures, OPEC price increases and the cattle cycle were nothing more than temporary contributors to a much more pervasive process.

When it comes to assigning blame for the rise in inflationary pressures, economists have their theories and politicians have their culprits, but both theories and culprits tend to have one of four labels: big business, big labor, big government or the Federal Reserve and its control over the money supply. More recently, however, there is a growing awareness that simple explanations which point the finger at one of the above-named culprits are inadequate or irrelevant.

Inflation today is best understood as simply an economic consequence of the American political process. If enough groups in society refuse to accept the constraints of existing monetary relationships (with the economy at or near full employment), the inflation ratchet is set in motion.

The explanation is fairly simple: If the price level is expected to remain roughly constant, any commodity or service whose price rises implies a lower price for at least one other commodity. In other words, the average price level remains unchanged. But a lower price for that other commodity generally implies lower incomes for its producers. Because our present political system-which encompasses the Federal Reserve-tends to operate on the basis of avoiding income losses for any significant bloc of voters (e.g. President Carter's audience of Missouri cattlemen), powerful efforts are made to ensure that price increases in one commodity are not allowed to be offset by price declines in one or more other commodities. As a result, there is a rise in the average price level with the rate of advance heavily influenced by the various stages of the business cycle. The only thing today's politician dreads more than rising prices is . . falling prices at least those that imply income losses for his constituents. But thanks to vast bureaucracies dispensing subsidies and favors, and armed with the fiscal and monetary tools forged by Keynes, Friedman and their disciples, no politician today need fear being turned out of office for causing prices to fall.

What makes the achievement of price level stability so difficult is not just the existing vast array of state, federal and local government programs, subsidies and regulations designed to maintain or increase incomes and prices, but the near collapse of self-restraint by most elements in society when it comes to asking for more such measures.

What has happened is nothing less than "the breakdown of the Madisonian political structure," as economic historian Douglas North puts it. That structure, erected at the Constitutional Convention in 1787, was designed to make it unprofitable for factions to redistribute wealth and income through the political process. No student of Washington or state capital politics today can deny that the never-ending parade of supplicants provides ample evidence for North's observation.

Furthermore, it is not just that the relative cost of using political instead of market-related measures to achieve economic objectives has declined: questions regarding the legitimacy of using political power for such ends are seldom even raised today. As Harvard political scientist James Q. Wilson points out, in dealing with such issues as unemployment, medical care and price and wage controls, Congressman (and, I would add, most other elected officials) argue about "how much" or "where" or "what kind," but not about "whether."

It is as if all the principal elements in society had stumbled across Aladdin's Lamp, and found that with a little hard rubbing, the genie of government would appear and grant each petitioner some device with which to increase his share of the pie. Unfortunately, the bitter price for this superficially easy road to a better life is the inflation ratchet.

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