Moreover, even a casual glance at how projected federal budgets compare with actual outcomes shows more serious discrepancies for projected deficit or surplus than for projected expenditures. Government can appropriate, and the administration can spend, definite dollar sums decided in advance (though they do not always do so); government does not levy taxes specified in dollars in advance. Third, it is important to separate issues. Personally, I do not believe that fiscal policy is a desirable instrument for economic stabilization; but that is a minority opinion, even in the economics profession, let alone among the broader group. In any event, the issue of limiting the size of government is separable from the use of fiscal policy for economic stabilization. A spending limitation does not prevent the use of fiscal policy for stabilization. Tax receipts will automatically vary with the cycle in a direction that is regarded as stabilizing, and this built-in effect can be strengthened or offset by discretionary changes in taxes. Changes in taxes can be a complete substitute for changes in spending to affect the economyindeed, many, if not most students of fiscal policy regard them as preferable. These are the reasons why I regard a constitutional limitation on government spending as a more effective device for enabling the public to limit government than a requirement for a balanced budget. BROOKINGS The Brookings Bulletin/Volume 16, Number 1/Summer 1979 Which Way Bruce K. MacLaury Public interest in proposals to limit federal spending and balance the budget will probably continue into the 1980s. In the following article, excerpted from Setting National Priorities: The 1980 Budget, President Bruce K. MacLaury of the Brookings Institution examines constitutional amendments and other proposed means of ensuring an annual balance between federal receipts and expenditures. GALLUP POLL in July 1978 found that 81 percent of the respondents favored a constitutional amendment requiring Congress to balance the federal budget every year. At the end of March 1979, twenty-nine of the necessary thirty-four states had approved some form of resolution asking Congress to call a constitutional convention for the purpose of proposing such an amendment. And the Ninety-sixth Congress itself started off with a flurry of bills and resolutions in a hasty effort to get at the head of the stampede. Demands for balanced budgets, reduced taxes, and limited federal expenditures are nothing new in this country. But they have taken on a new political dimension with the passage last year of California's Proposition 13, which drastically cut property taxes in that state. For years, bills to require balanced federal budgets have been introduced in Congress as a matter of ritual, but never before have they received a serious hearing. The public's frustration with government has many probable causes the past decade's unexpectedly large increases in income transfer programs, continuing reports of inefficiency and waste, rising social security taxes, and the expanding web of regulations and red tape. But no single factor, it seems, has had a more corrosive effect on public attitudes, particularly attitudes toward government, than the persistence and recent ac celeration of inflation. Few people blame government alone for the nation's inflation problems-rising energy and food prices did play a role. But most people do assign government an important responsibility for inflationand with reason. The administration and the Congress have contributed to inflation in a number of separate actions that individually seemed negligible for inflation arithmetic, but that cumulatively added to the momentum of rising wages and prices-hikes in payroll taxes and minimum wage rates, acreage allotments and higher crop support prices, import limitations and steel trigger prices, inade 2 have in mind "excessive" government expenditures or budget deficits as the major culprits. For this reason, they propose a variety of limitations on spending and on defi cits. A good case can in fact be made for further strength■ening controls over the federal budget. The risk, however, is that some of the proposed cures are far worse than the present disease. In evaluating this risk, it is important to distinguish between limitations imposed by constitutional amendments and those effected through changes in federal law. Rationale for Budgetary Limitations A fundamental issue in the current debate is whether deficits in the federal budget in and of themselves contribute to inflation. No one would argue that such deficits never add to inflationary pressures-they did add to them during the Vietnam war and in 1972-73. On those occasions, the excess of federal expenditures over receipts was superimposed on an economy whose re Setting National Priorities: The 1980 Budget, Joseph A. Pechman, editor. Published May 1979, 229 pages, $4.95 paper, $11.95 cloth. sources were already fully employed. In such circumstances, additional demand, whether from government or from the private sector, results not in additional output but in inflation. In different circumstances, however, when resources -human and capital-are underemployed, an increase in total demand can increase output and employment without necessarily creating pressures that generate inflation. Then the use of the federal budget to counter slack in other sectors has obvious advantages and, conceptually at least, few costs. Moreover, fiscal stimulus can be achieved through tax cuts as well as by expenditure increases (though not necessarily with the same incidence, timing, and multipliers), so that during recessions countercyclical policies need not result in swollen outlays even when they do result in deficits. The Brookings Bulletin A QUARTERLY DEVOTED TO BROOKINGS PUBLICATIONS Copyright © 1979 by the Brookings Institution The Brookings Institution is an independent organization drooted to nonpartisan research, education, and publication in economics, government, foreign policy and the social sciences generally. Second-class postage paid at Washington, D.C. USPS I.D. No. 14209; Publication No. 551640 Postmaster: Change-of-address cards (Form 3579) should be sent to The Brookings Institution 1775 Massachusetts Avenue, N.W., Washington, D.C. 20036 THE BROOKINGS BULLETIN But even though there is no necessary link between federal deficits and inflation or between countercyclical fiscal policy and an expanding government role, the record is pretty clear: 1. Federal deficits have contributed to excess demand pressures and inflation in critical times in the past. 2. The difference between an economy that is "underemployed" and one that is "fully employed" is difficult to gauge, partly because it is defined by a range rather than by a point. Moreover, the range itself is changing with changes in the competitive structure of industries, the work force, income maintenance programs, patterns of employment, and the availability of efficient plant capacity. 3. The processes by which fiscal policy is adapted to changing economic conditions are ponderous and unreliable, a problem that is compounded by the uncertain lags in the impact of discretionary fiscal actions on the economy itself. 4. Fiscal policy decisions are biased toward deficits during recessions, without the discipline of surpluses during periods of excess demand, and toward expenditure increases rather than tax reductions to provide stimulus. For all these reasons, countercyclical fiscal policy, though it has been--and remains-a valid tool for improving the performance of the economy, has limitations that are becoming increasingly apparent. Moreover, lagging productivity and a somber budget outlook for the next five years make budget discipline imperative. Consequently, a widespread search is on for some means of correcting the political biases that have resulted in sixteen deficits in the past seventeen years. But it is a long and perilous leap from this conclusion to a demand that there be no more deficits except in declared national emergencies. The Balanced Budget Amendment The most radical suggestion proposed in the name of fiscal responsibility is that deficits in the federal budget be prohibited by constitutional amendment. Only by incorporating this requirement in the fundamental law of the land, it is argued, can the pressures toward excessive federal spending and deficits be held in check. Analogies are sometimes drawn with similar requirements in state constitutions and city charters. However, such analogies frequently fail to point out that (1) the requirement for federal budget balance usually applies to receipts and outlays in the unified budget-which includes all types of purchases-while state and local governments usually balance the current account and finance capital outlays through borrowing; (2) individual states, unlike the federal government, have neither the THE BROOKINGS BULLETIN for acceptance into a dialysis program: disabling uremia (an excess of metabolic wastes in the blood). Another change is the shift from dialysis at homethe least expensive setting-to dialysis in outpatient centers. Before medicare started paying for dialysis, 40 percent of all dialysis patients dialyzed at home, which costs about $7,000 per year as against $15,000 to $25,000 in an outpatient clinic. By 1977 this proportion had dropped to 20 percent, and medicare was paying an average of $16,800 per patient annually. Dialysis at outpatient centers relieves families of a heavy responsibility but costs the taxpayers much more. According to Russell, these trends are the inevitable response to a financing program that removes cost as a constraint on the use of medical resources. Renal dialysis unquestionably prolongs the lives of people who could not survive without it. But, as the costs to the people making the decisions have declined, dialysis has been extended to people who gain less from it in added life and quality of life. And the shift to dialysis centers reflects the tendency to push investment to the point of small or zero benefit when the costs facing decisionmakers are small or zero. Where to Draw the Line? The economics of renal dialysis and other technologies points to the heart of the cost problem: that to pursue every possible gain in medical care, however small or expensive, is enormously, perhaps infinitely, costly. Included in Russell's study is a comparison of the cost control policies used in Sweden, Great Britain, France, and the United States. The experience of these countries suggests that policymakers can choose among four levels of intervention to guide the diffusion of medical technology and thus the use of resources. Each step in the hierarchy represents a growing commitment to cost containment over other goals, starting at the lowest step with no concern about cost at all. The United States was in this stage in 1965, when the Heart Disease, Cancer, and Stroke Amendments established regional medical programs to promote new techniques for caring for patients with these diseases and to translate research into practice. Moving to step two, governments concern themselves with whether new technologies are being used efficiently. Without making judgments about the volume of use, they ask whether that volume is being produced at the lowest possible cost. In the United States, promoting technology gave way to improving efficiency during the decade between 1965 and 1974, when the federal government required each state to enact certificate-of-need laws. Since the states have been unguided in applying those laws until recently, a coherent national policy has not yet emerged. |