SPEAKERS CONTENTS INSERTS
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BALANCED BUDGET AMENDMENT
SUBCOMMITTEE ON THE CONSTITUTION
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
H.J. Res. 22
MARCH 6, 2003
Serial No. 1
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Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://www.house.gov/judiciary
COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
SPENCER BACHUS, Alabama
JOHN N. HOSTETTLER, Indiana
MARK GREEN, Wisconsin
RIC KELLER, Florida
MELISSA A. HART, Pennsylvania
JEFF FLAKE, Arizona
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
STEVE KING, Iowa
JOHN R. CARTER, Texas
Page 3 PREV PAGE TOP OF DOCTOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee
JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
PHILIP G. KIKO, Chief of Staff-General Counsel
PERRY H. APELBAUM, Minority Chief Counsel
Subcommittee on the Constitution
STEVE CHABOT, Ohio, Chairman
Page 4 PREV PAGE TOP OF DOCSTEVE KING, Iowa
WILLIAM L. JENKINS, Tennessee
SPENCER BACHUS, Alabama
JOHN N. HOSTETTLER, Indiana
MELISSA A. HART, Pennsylvania
TOM FEENEY, Florida
J. RANDY FORBES, Virginia
JERROLD NADLER, New York
JOHN CONYERS, Jr., Michigan
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ADAM B. SCHIFF, California
CRYSTAL M. ROBERTS, Chief Counsel
PAUL B. TAYLOR, Counsel
KRISTEN SCHULTZ, Full Committee Counsel
DAVID LACHMANN, Minority Professional Staff Member
C O N T E N T S
MARCH 6, 2003
The Honorable Steve Chabot, a Representative in Congress From the State of Ohio, and Chairman, Subcommittee on the Constitution
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The Honorable Robert C. Scott, a Representative in Congress From the State of Virginia
The Honorable Jerrold Nadler, a Representative in Congress From the State of New York, and Ranking Member, Subcommittee on the Constitution
The Honorable Ernest J. Istook, Jr., a Representative in Congress From the State of Oklahoma
John Berthoud, Ph.D., President, National Taxpayers Union, National Taxpayers Union Foundation
Kent Smetters, Ph.D., Assistant Professor, The Wharton School
Mr. Richard Kogan, Senior Fellow, Center on Budget and Policy Priorities
Mr. William M. Beach, Director, Center for Data Analysis, John M. Olin Senior Fellow in Economics, The Heritage Foundation
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LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Steve Chabot, a Representative in Congress From the State of Ohio, and Chairman, Subcommittee on the Constitution
BALANCED BUDGET AMENDMENT
THURSDAY, MARCH 6, 2003
House of Representatives,
Subcommittee on the Constitution,
Committee on the Judiciary,
The Subcommittee met, pursuant to call, at 12:06 p.m., in Room 2226, Rayburn House Office Building, Hon. Steve Chabot, Chairman of the Subcommittee, presiding.
Mr. CHABOT. The Subcommittee will come to order. This is the Subcommittee on the Constitution. I'm Steve Chabot, the Chairman.
This afternoon, the Subcommittee on the Constitution convenes to hear testimony concerning the Balanced Budget Amendment. The major impetus for balancing the Federal budget is the impact of the Federal debt and interest payments on future generations of Americans. The Federal budget deficit has become one of the most persistent political issues in recent years. Since the 1930's, dozens of proposals have called for laws or constitutional amendments that would limit the growth of the Federal budget or of the public debt.
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Legislative efforts to adopt a balanced budget have largely proven unsuccessful in eliminating deficit spending. Congress has repeatedly relaxed the deficit targets in the Balanced Bbudget and Emergency Deficit Control Act of 1985, Gramm-Rudman-Hollings Act, and new budget control mechanisms have not offered a realistic long-term prospect of continued deficit reduction. Only a constitutional amendment will fully ensure a balanced budget.
Congress balanced the budget in 1997 for the first time in 30 years. Since then over $453 billion in debt has been retired. However, $233 billion has been added due to post September 11 security spending and a softening economy. Congress continuedCongress cannot continue to run up such deficits each year. A balanced budget amendment is needed to hold Congress accountable for its management of public funds and prevent any future congresses from engaging in deficit spending.
The President's fiscal year 2004 budget includes $352.3 billion for interest payments on the outstanding debt. That figure will rise as long as we continue to have deficits. The cost of financing the debt we've already accrued would cover the bulk of the cost for the war on terror which the President's budget estimates at $392.7 billion. If the budget were balanced we would be in a much better position to deal with large, necessary expenditures that occur outside the normal budget process.
Furthermore, a balanced budget amendment is needed to protect Social Security, Medicare, and other priorities important to America's children and seniors. Interest payments are the second largest single item of Federal spending following Social Security. Controlling the debt will provide Government with the cash to ensure the prosperity of future generations and safeguard funds designated for seniors and their existing medical needs.
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Public opinion surveys consistently show that 70 to 80 percent of the population support passing a balanced budget amendment to the Constitution. Balancing the budget has made it possible for Congress to pass tax cuts, including the largest tax cut in recent history. Tax cuts have spurred economic growth, helping millions of American families. Since 1996 nearly 9.7 million jobs have been created, and nonresidential investment has increased 34.6 percent. A typical family has saved $672 or more in interest expenses every year because balanced budgets have reduced inflation pressure and interest costs.
In conclusion, a balanced budget amendment is necessary to eliminate Federal deficits and restore the economic health of our Nation. The benefits of the amendment are clear. Once Congress eliminates deficits, funds will be available for private investment, resulting in lower inflation, reduced interest rates and increased productivity and overall economic growth. With this in mind I look forward to hearing from our witnesses today.
[The prepared statement of Mr. Chabot follows:]
PREPARED STATEMENT OF THE HONORABLE STEVE CHABOT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHO
This morning the Subcommittee on the Constitution convenes to hear testimony concerning the Balanced Budget Amendment. The major impetus for balancing the federal budget is the impact of the Federal debt and interest payments on future generations of Americans. The Federal budget deficit has become one of the most persistent political issues in recent years. Since the 1930s, dozens of proposals have called for laws or constitutional amendments that would limit the growth of the federal budget or of the public debt.
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Legislative efforts to adopt a balanced budget have largely proven unsuccessful in limiting deficit spending. Congress has repeatedly relaxed deficit targets in the Balanced Budget and Emergency Deficit Control Act of 1985 (Gramm-Rudman-Hollings Act) and new budget control mechanisms have not offered a realistic long-term prospect of continued deficit reduction. Only a Constitutional amendment will fully ensure a balanced budget.
Congress balanced the budget in 1997, for the first time in 30 years. Since then, over $453 billion in debt has been retired. However, $232 billion has been added due to post-September 11th security spending and a softening economy. Congress cannot continue to run up such deficits each year. A balanced budget amendment is needed to hold Congress accountable for its management of public funds and prevent any future Congress from engaging in deficit spending.
The President's FY2004 Budget includes $352.3 billion for interest payments on the outstanding debt. That figure will rise as long as we continue to run deficits. The cost of financing the debt we've already accrued would cover the bulk of the cost for the war on terror, which the President's budget estimates at $392.7 billion. If the budget were balanced, we would be in a much better position to deal with large, necessary expenditures that occur outside of the normal budget process.
Furthermore, a balanced budget amendment is needed to protect Social Security, Medicare and other priorities important to America's children and seniors. Interest payments are the second largest single item of federal spending following Social Security. Controlling the debt will provide government with the cash to ensure the prosperity of future generations and safeguard funds designated for seniors and their existing medical needs.
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Public opinion surveys consistently show that 7080% of the population support passing a balanced budget amendment to the Constitution. Balancing the budget has made it possible for Congress to pass tax cuts, including the largest tax cut in recent history. Tax cuts have spurred economic growth, helping millions of American families. Since 1996, nearly 9.7 million jobs have been created, and nonresidential investment has increased 34.6%. A typical family has saved $672 or more in interest expenses every year because balanced budgets have reduced inflation pressure and interest costs.
In conclusion, a balanced budget amendment is necessary to eliminate federal deficits and restore the economic health of our nation. The benefits of the amendment are clearOnce Congress eliminates deficits, funds will be available for private investment resulting in lower inflation, reduced interest rates and increased productivity and overall economic growth. With this in mind, I look forward to hearing from our witnesses today.
Mr. CHABOT. And at this time I would yield to the gentleman from New York, the Ranking Member of the Committee if he would like to make an opening statement or if he'd like to defer to Mr. Scott for a minute or two here.
Mr. NADLER. Let Mr. Scott speak for a minute or two, besides I want to read the prepared statement.
Mr. CHABOT. Thank you. We'll hear from Mr. Scott then.
Mr. SCOTT. Thank you. Thank you, Mr. Chairman. Mr. Chairman, as we have the witnesses, my question to them, and I hope they all deal with it, is not whether or not generically a balanced budget is better or worse than a budget in serious deficit, but whether or not this constitutional amendment will help things or make them worse. We don't need a balanced budget amendment. What we need is a balanced budget. We're dealing with a budget right now that is a result of massive tax cuts that have thrown this thing so far out of balance that if you eliminated all of the nondefense, nondiscretionary spending, the on-balancethe on-budget part of thethe non-Social Security trust funds, if you eliminated all of Government, you still would not be in balance. The nondefense discretionary part of the budget is $425 billion. This thing is 460 some million dollars in deficit right now, offset a little bit by the Social Security and Medicare trust funds.
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The Chairman has said it is all because of 9/11. Wrong. this thing went out of balance, it was out of balance on September 10, and we didn't change. Now, we've got an excuse for it to be in deficit. Now, we just keep going and going and going. This budget will not balance itself whether we have a balanced budget constitutional amendment now. You have got to take some tough votes and wasting time with a constitutional amendment won't help. We need to balance the budget, get serious, and you can't have all these massive tax cuts that the Chairman has bragged about, and expect the budget to suddenly come in balance.
I thank you, Mr. Chairman, for the opportunity to ventilate a little bit. [Laughter.]
Mr. CHABOT. Thank you.
Mr. Nadler, did you want to make an opening statement?
Mr. NADLER. Yes, I do. Thank you, Mr. Chairman.
Mr. Chairman, the fact that we're here considering, allegedly consideringI mean we know what's going to happenthis balanced budget constitutional amendment is an exercise of the greatest hypocrisy I have seen in my years in Congress.
When President Clinton left office the forecast surplus over the next 10 years was $5.6 trillion. Based on that, relying on that, President Bush and the Republican Party assured us we could do $1 1/2 trillion in tax cuts. Some Democrats said, well, that $5.6 trillion isn't firm. It's fairlyit assumes there will never be a recession, that the boom will go on foreverbooms never go on foreverand certain other assumptions, but we were told, ''You can rely on that,'' and so we passed this huge tax cut. Now we're being told to extend the tax cuts, make them permanent, add additional tax cuts such that if we followed the instructions that we are being asked at the request of the President and the majority leadership of this House. The foregone revenue from these two tax cuts combined will be about $4 trillion over a decade, $4 trillion.
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We've now gone to where we're going to havewe're forecast to have $2.6 trillion in deficits over the next 10 years before we pass these tax cuts. And if we pass them, of course that doesn't count the war with Iraq which is expected to cost zero dollars according to the current budget estimates. You're obviously going to have huge deficits.
But the Republicans have recently said thathave said that running deficits are desirable. Treasury Secretary Snow recently said debts don't matter. Tom Delay denounced Alan Greenspan for suggesting that the deficit may be a problem, and that additional tax breaks might be bad for the country. SomeoneI forget which Member of the House was quoted in the New York Times a few weeks ago saying, that well, if you had to choosehe used to be a deficit hawk, but now he understood better, and if he had to choose between big Government with a surplus and small Government with a huge deficit, he'd take the small Government with the huge deficit, and that deficits are useful. Tom Delay said this. Deficits are useful for making Government spend less money because if you actually debate, you can spend money on education or housing, whatever, you lost the debate. But if you say we're broke, you can forego that spending.
The same people who are telling us that deficits don't matter and that we want to force a deliberate deficit in order to hold down spending, now have the audacity to bring this piece of crap before us to amend the Constitution of the United States to forbid what they are deliberately doing in order, presumably, to hide from the American people that they are in fact deliberately creating very large-scale deficits.
We don't need a constitutional amendment. President Clinton, the Democratic leadership of the House and the Senate back in 1993, and to a lesser extent the Republican leadership of the House and Senate after 1995, showed that if you cut expenditures and you don't cut taxes too much, you canor you increase taxes as was done in 1993, and you have proper stewardship over the economy and have decent growth rates, you can balance the budgets. It took 8 years to undue the damage from the '81 tax cuts that led us into quintuple the national debt during the Reagan and first Bush years. We turned that around in the Clinton administration, took about 6 months to reverse that in the second Bush administration, and now the people who have put this nation back on the path to large-scale deficits, no matter what we do, large-scale deficits, just in time for the baby boomers to retire and start putting real pressure on Social Security and Medicare and say it doesn't matter. Now, these people have the audacity to say, let's amend the Constitution with an unworkable amendment, so that they can go up and lie to the American people and says, see, we're okay. We want to support balanced budgets. The other side, the Democrats don't because they won't vote, or some of them won't vote for a balanced budget amendment. But obviously, it's all a lie because they don't care about a balanced budget because they told us that.
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So I'm going to put my statement, my written statement into the record because it dignifies this amendment by actually talking to its provisions. I'm not going to do that right now because frankly, the audacity, the dishonesty and the hypocrisy of bringing up this amendment at this time is so breathtaking, that if I actually started talking about the provisions of it, I'd probably violate some rule. So I'll submit this for the record, Mr. Chairman.
I yield back.
Mr. CHABOT. Thank you. I think you already violated several rules during the course of that tirade, but we'll overlook that at this time.
I would ask unanimous consent to permit Mr. Istook to participate in the Committee. He's the principal sponsor of the constitutional amendment. I would also ask that all Members have 5 legislative days in which to revise and extend their remarks and to include extraneous matter.
And, Mr. Hostettler, did you want to make any type of opening statement?
Mr. HOSTETTLER. No, thank you.
Mr. CHABOT. Thank you. If not, I'll go ahead and introduce the witnesses at this time.
Our first witness will be John Berthoud, President of the National Taxpayers Union, and the National Taxpayers Union Foundation in Alexandria, Virginia. Founded in 1969, NTU is the Nation's largest grassroots taxpayer group with 335,000 members in all 50 States. The foundation was founded in 1977 and provides critical research on a variety of tax and fiscal issues. Prior to joining NTU Dr. Berthoud worked for a variety of public policy organizations in Washington. He is presently an adjunct lecturer at George Washington University, teaching graduate level courses on budgetary politics. Mr. Berthoud has been a guest on hundreds of radio and television programs, and his work has appeared in a wide variety of publications across the country, and we welcome you here this afternoon, doctor.
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Our second witness will be Kent Smetters, Assistant Professor at the Wharton School at the University of Pennsylvania. Mr. Smetters received his Ph.D. in economics in 1995 from Harvard University and worked at the Congressional Budget Office from 1995 to 1998, where he conducted research on Social Security and tax reform. He has been an assistant professor at the Wharton School since 1998, and served as a visiting professor at the Stanford Economics Department during the 20002001 academic year. Mr. Smetters was appointed Deputy Assistant Secretary for Economic Policy of the U.S. Treasury Department on July 3rd, 2001, where he served until August 30th, 2002, when he returned to the University of Pennsylvania. He remains active in Washington, D.C., including serving as a member of the Blue Ribbon Panel on Dynamic Scoring for the Joint Committee on Taxation. And we welcome you here this afternoon.
Our third witness will be Richard Kogan, Senior Fellow at the Center on Budget and Policy Priorities. Mr. Kogan joined the Center in January 2001, specializing in Federal budget issues including aggregate spending, revenue surpluses and deficits and debt. This is his second tour at the Center, where he was a senior fellow in 1995 and 1996. Prior to that Mr. Kogan served for 20 years on the staff of the Committee on the Budget of the U.S. House of Representatives, most recently as the Director of Budget Policy. In 1990 he designed and drafted the Budget Enforcement Act, which established caps on discretionary appropriations and the pay-as-you-go rule for tax and entitlement legislation. Prior to that Mr. Kogan served for 5 years in the Congressional Research Service, specializing in budgetary conflict between the Executive and Legislative Branches. He holds a B.A. from Yale University. And we welcome you here this afternoon as well.
Our final witness will be William Beach, the John M. Olin Senior Fellow in Economics and Director of the Center for Data Analysis at the Heritage Foundation. As CDA Director, Mr. Beach oversees Heritage's original statistical research on taxes, Social Security, crime, education, trade and a host of other issues. He was instrumental in developing the state of the art econometric models Heritage uses to estimate and detail how proposed tax changes will likely affect individuals, families and various business sectors, as well as the overall national economy. Prior to joining Heritage in 1995, Mr. Beach served as a litigation economist with two Kansas City, Missouri law firms, Campbell and Bisefield and Watson S. Marshall and Angus, where he specialized in analyzing how antitrust legal remedies will alter product pricing and availability. Later as an economist for Missouri's Office of Budget and Planning, he designed and managed the State's econometric model and advised the Governor on revenue and economic issues. Prior to that, Mr. Beach served as President of the Institute for Humane Studies at George Mason University. And we welcome you here this afternoon as well.
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And we will begin with Dr. Berthoud.
STATEMENT OF JOHN BERTHOUD, PRESIDENT, NATIONAL TAXPAYERS UNION, NATIONAL TAXPAYERS UNION FOUNDATION
Mr. BERTHOUD. Mr. Chairman, thank you very much. It's a pleasure to be on a very distinguished panel. I must imagine I'm only going first because I have a last name that starts with a ''B'', although Bill Beach actually then should go first. But it's a pleasure to be with this distinguished panel and before this distinguished Subcommittee today.
Mr. CHABOT. Doctor, I forget to mention we ask everybody to limit it to 5 minutes, their testimony. We'll give you an extra 5 seconds, sir, because I interrupted you.
Mr. BERTHOUD. Thank you very much. I would like to just briefly today mention and summarize my remarks, focus in on two points, why deficits matter and what do we do about deficits.
It's the position of the National Taxpayers Union that we should enact the balanced budget amendment that is being considered today, and this will result in better public policy. In my testimony you will see I outlined four basic areas and four basic lines of reasoning why deficits to matter.
Page 16 PREV PAGE TOP OF DOC First, savings and investment. I have a quote in my testimony from Herbert Stein: ''The important effect of the absolute size of the deficit or surplus is the effect on private investment. That is, I think, the view now held by most, although not all, economists. The argument is simple. Private savings equal the sum of private investment plus the Government deficit. Private saving is totally absorbed in these two uses. The larger the Government deficit is, the smaller private investment will beunless the larger Government deficit is matched by an equally larger total of private savings.''
And he believes that when increases in Government spending drives deficits higher, there is an adverse impact for the economy as Government crowds out the more productive private sector activity.
Secondly, second: inter-generational issues. Dr. Smetters, who will follow me, hasI will just defer to him and his terrific testimony, excellent testimony on long-term liabilities.
Third. Public cynicism. Certainly and unfortunately, particularly in the last 5 or 6 years in Washington, the public has many reasons to be cynical about Washington and the operation of American politics. I think rising levels of distrust are poison in a system that is a democratic system based on the will and trust and participation of individual citizens. While there are other causes, I believe that large and continuous Federal deficits add to this distortion and cynicism.
Finally, distorting the budget decision-making process. Deficits, we believe, lead to more Government than would otherwise be the case, and while different Members of the Committee, Mr. Scott mentioned, didn't seem to support tax cuts being enacted. I think we have different visions on what might not be enacted were a balanced budget amendment enacted. The National Taxpayers Union, for example, would be very happy if we had a BBA last year, and that would have prevented perhaps something like the Farm Bill, which we lobbied hard against, being enacted. Mr. Scott perhaps would have been happy to see less tax cuts, but in any event, I think Washington would be a very different place. The output of Federal Government would be very different.
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Howin terms of how does deficit finance expand Government, let me offer another quote from Nobel Laureate Milton Friedman: ''As a strong supporter of a constitutional amendment requiring the Federal Government to balance its budget and limit spending, I clearly share the aversion to deficits that politicians of all shades of opinion have been expressing so loudly. But my reasons are quite different from theirs. In my view, the key question to deficits is political, not economic. The economic harm attributed to deficitswhether high interest rates, inflation or economic stagnationcomes not from the deficits but from the high level of Government spending.''
And I certainly would thinkagain, I think the example I would point toit's hard to imagine in your balanced budget amendmentif we had a balanced budget amendment in place last year, things like the farm subsidy bill would have been enacted, butand so Friedman finishes: ''comes not from the deficits but from the high level of Government spending that those deficits help finance.''
And I think the evidence that Dr. Friedmanthe evidence suggests that Dr. Friedman is indeed correct. In 1962, total nondefense Federal outlays were a mere 9.5 percent of GDP. By 2002 nondefense outlays were 16.1 percent of GDP, an increase in just 40 years, 40 years of my life, of 69 percent. Mr. Nadler is of course correct, we did indeed balance the budget for several years. I would, with due respect, argue that it was much to doI think Congressman Nadler said expenditures
Mr. NADLER. Nadler.
Page 18 PREV PAGE TOP OF DOC Mr. BERTHOUD. Excuse me, I'm sorry. Nadler said that expenditures were cut. The only area that we've really seen expenditures cut was
Mr. NADLER. And taxes increased, I said both.
Mr. BERTHOUD.were national defense. Nondefense spending actually grew at a very healthy level. The two reasons, when I look at the numbers published by the CBO or OMB, of why we balanced the budget, I wishand I know Republicans and Democrats unanimously would like to claim credit for thatmuch less individual actions by Congress and the President, but more the tremendous economy that we had in the late 1990's and a massive cutback in national defense spending were the two reasons, with all due respect to the Members of the Committee and your dedication to deficit reduction.
So it's my belief that outside ofand NTU's beliefthat outside of a time such as late 1990's, which was very much an anomaly in American history, and certainly you look at the last 40 years under Republican and Democrat controlled White House and Congress, we see continually and repeatedly deficits are the norm. I wishAlice Rivlin and others have made a case that we need is better leadership. I wish that were the case. The fact is that we can't have that on a continual basis. So as you yourself have said, Mr. Chairman, statutory measures have not worked, not worked well, not delivered us permanent deficit, ending of deficits, and so weI think we need a permanent constitutional amendment which will require Congress and the President, year in and year out, to balance expenditures with revenues.
[The prepared statement of Mr. Berthoud follows:]
Page 19 PREV PAGE TOP OF DOCPREPARED STATEMENT OF JOHN BERTHOUD
Chairman Chabot and Members of the Subcommittee, my name is John Berthoud. I am President of the National Taxpayers Union (NTU), a nationwide grassroots lobbying organization of taxpayers with 335,000 members. You can find out all about NTUand our educational affiliate, the National Taxpayers Union Foundationon our website: www.ntu.org.
I come here today to offer testimony in favor of the Balanced Budget Amendment (BBA) that has been introduced by Representative Istook, Representative Stenholm, and some 100 of their colleagues. This is the same Balanced Budget Amendment that passed the House with 300 votes in 1995, only to fall one vote short of the required 2/3 margin in the Senate.
I will argue today that a BBA will improve the fiscal process of the United States and is in our long-term best interestsboth economically and politically.
II. THE PROBLEM OF DEFICITS
Large federal deficits have plagued the United States for decades. While the problem abated for four years at the end of the 20th century, we have now returned to deficits for the foreseeable future. As this Subcommittee well knows, the White House is now projecting deficits for this year and next in excess of $300 billion. And those figures don't include the costs of any war in the Middle East.
Page 20 PREV PAGE TOP OF DOC NTU believes deficits and debt lead to four fundamental problems for our economy and nation.
1. Savings and Investment. While different studies have come to varied conclusions on the impact of deficits, most economists would agree that federal deficits are a problem insofar as they reduce private sector investment. Herbert Stein summarized the thinking of much of the economics profession when he noted:
[T]he important effect of the absolute size of the deficit or surplus is the effect on private investment. That is, I think, the view now held by most, although not all, economists. The argument is simple. Private savings equal the sum of private investment plus the government deficit. Private saving is totally absorbed in these two uses. The larger the government deficit is, the smaller private investment will beunless the larger government deficit is matched by an equally larger total of private savings.(see footnote 1)
NTU believes that when increases in government spending drive deficits higher, there is an adverse impact for the economy as government crowds out more productive private sector activity.
2. Inter-generational Issues. Second, federal deficits add to our mounting generational imbalancethe huge fiscal burdens we are leaving for our children. Large federal deficits and debt on top of entitlement programs that are facing grave long-term financing problems are a terrible legacy for the future.
Page 21 PREV PAGE TOP OF DOC The inter-generational aspects of debt have been a concern of leaders in this nation since the beginning of our country. To Jefferson, if one generation incurred a public debt, it was in violation of ''natural law'' because it raised ''the question whether one generation of men has a right to bind another.''(see footnote 2)
Lead sponsor Ernest Istook has made the argument well, ''While we manage our national and homeland security, we must plan ahead to guarantee that we return to a balanced budget once we overcome these challenges. We must assure our kids and grandkids inherit freedom and security, but do not inherit a crushing national debt.''(see footnote 3)
3. Public Cynicism and a Break-down in Government. Certainly, and unfortunately, the public has many reasons to be cynical about Washington and American politics. Rising levels of distrust of government are poison to a democracy. While there are other causes, we believe that large and continuous federal deficits add to this cynicism.
Beyond turning off the public, large and continuing deficits lead to less responsive government. While some have made the case that a Balanced Budget Amendment would limit the flexibility of the country to respond to public crises, in reality, deficits are a far greater impediment. Comptroller General Charles Bowsher observed a number of years ago that: ''The deficit has severely hampered the ability of the Congress and the administration to deal with emerging issues that are of growing importance to the American people.''(see footnote 4) Bowsher cited AIDS as one example of a problem not dealt with promptly because of our large deficits.
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4. Distorting the Budget Decision-making Process. Finally, deficits lead to more government than would otherwise be the case. This is bad for two reasons: besides leaving society with a non-optimal mix of government and private sector, larger government also means lower economic growth.
How does deficit finance expand government? Nobel Laureate Milton Friedman said in 1984 that:
As a strong supporter of a constitutional amendment requiring the federal government to balance its budget and limit spending, I clearly share the aversion to deficits that politicians of all shades of opinion have been expressing so loudly. But my reasons are quite different from theirs. In my view, the key question to deficits is political, not economic. The economic harm attributed to deficitswhether high interest rates, inflation or economic stagnationcomes not from the deficits but from the high level of government spending that those deficits help to finance.(see footnote 5)
Taxes are the price we the citizenry pay for government services. When government pays for programs through deficit finance, the price of government for today's citizens declines. Given this subsidy from future generations, it is only natural that we as a society will thus opt for more government than we would have chosen if we had to pay the full price for it. By analogy, if a consumer is weighing whether to buy a Pepsi for $1 or remain thirsty, it may be a tough choice. If that consumer can pass half the cost of that Pepsi onto some unknown person living in the future, the choice to consume becomes very easy.
Page 23 PREV PAGE TOP OF DOC The evidence is suggestive that Friedman is correct that allowing deficit finance leads to higher spending. In 1962, total non-defense federal outlays were 9.5 percent of GDP. By 2002, non-defense federal outlays were 16.1 percent of GDP, an increase of 69 percent.(see footnote 6)
And there is a growing body of evidence linking high government spending with lower economic growth. For example, a Rand Corporation study found that for every 10 percent of a nation's total annual income that is spent by government, the average growth rate of that nation's economy is reduced by one percent annually.(see footnote 7)
Because of the inverse relationship between government spending and economic growth, through holding down deficits and excessive government spending, we can substantially increase our long-term economic prosperity.
III. STATUTORY MEASURES JUST WON'T SUFFICE
So it seems clear that deficits driven by higher federal spending harm the economy. The question is, how can we stop deficits?
Alice Rivlin and others have made the case that rather than procedural changes such as a Balanced Budget Amendment, we need more virtuous leadership in Washington.(see footnote 8) This is not a new plea in American politics and unfortunately, proponents of better leadership for the nation have yet to explain how such leadership is to be permanently attained. This goal is as illusory in the 21st century as it was in the 18th century, when it was discussed at length in The Federalist Papers.
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So we need some procedural change. In light of the difficulty of passing a constitutional amendment, there have been numerous efforts since adoption of the Congressional Budget and Impoundment Control Act in 1974 to statutorily change the budget rules to fight deficits.
The most ambitious of these efforts was the Gramm-Rudman-Hollings experiment of 19851990. This effort may have modestly reduced deficitson the order of $15 billion per year, mainly through limiting spending.(see footnote 9) But the same factor that undermined the law's effectiveness ultimately killed itGramm-Rudman-Hollings was a mere statute. Congress and the President could roll back, and in the end terminate, the deficit targets when the political decisions became too tasking.
Mr. Chairman, as you yourself have summarized, ''legislative efforts to balance the budget have proven largely unsuccessful in limiting deficit spending. The surpluses we enjoyed for the last few years have proven to be a short-term anomaly as Congress has repeatedly relaxed deficit targets and circumvented statutory spending limits . . . Given the propensity of Congress to evade legislative efforts to control spending, a constitutional amendment is the most effectiveand perhaps onlyway to ensure that Congress balances its budget each year.''(see footnote 10)
Only a constitutional guarantee will deliver year after year of balanced budgets for the United States. As Judiciary Committee Chairman Sensenbrenner has stated, ''The time has come for a little constitutional supervision over the Congress, just like we have to have parental supervision over our children.''(see footnote 11)
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There are no magic solutions in public budgeting or public policy in general. NTU does not pretend that the BBA will instantly cure all the nation's fiscal problems or correct all long-term financial imbalances. But we come before this distinguished Subcommittee today to state that enactment of a Balanced Budget Amendment would without a doubt produce superior results to the policies of the preceding decades.
The version of the BBA that Representatives Istook and Stenholm have introduced is very good. There are no loopholes in itas we've seen in other versions of the BBA that Congress has considered over the years. The National Taxpayers Union and our 335,000 members urge the Subcommittee to favorably report this measure.
Mr. CHABOT. Thank you.
Mr. BERTHOUD. Thank you
Mr. CHABOT. Dr. Smetters?
STATEMENT OF KENT SMETTERS, ASSISTANT PROFESSOR, THE WHARTON SCHOOL
Page 26 PREV PAGE TOP OF DOC Mr. SMETTERS. Thank you, Chairman and the Members of the Committee for the opportunity to speak on this amendment. I supportI applaud the supporters of this amendment and their efforts.
But in order to significantly increase the effectiveness, I would urge you first to reform the flawed cash-flow accounting system that is currently being used by the Government, and upon which this amendment is necessarily based. In fact the accounting system, if it was used in the private sector, would be illegal. As a director and officer you would go to jail if you used the current accounting system as used by the Federal Government because it ignores massive future liabilities.
My written remark is pretty comprehensive. I'll just make three short points here.
First, I'd focus on thesimply on the debt held by the public, which is in fact a backward-looking measure. This amendment would ignore a large burden that's actually being passed on to future generations. The Government right now says that we're passing a debt to future generations of about 4 trillion, but if you had to calculate it properly, using actuarial principles, the debt is actually closer to $43 trillion. $35 trillion of this imbalance comes from Medicare, and thee are 7 trillion from Social Security. The rest of the Government is in pretty good shape with an imbalance of only about .7 trillion, and by the way, this includes the President's newest proposed tax cuts.
And so by present value, we mean we have to come up with $43 trillion immediately today in order to put fiscal policy in the U.S. on a sustainable course, so if we wait, we would have to come up with more than $43 trillion in future years to put fiscal policy on a sustainable course.
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Let me give it to you in the form of an example. Suppose that we shut down half of the Government, military, law enforcement, Medicaid, NASA, everything, half of the Government, everything except Social Security and Medicare. And we do that not just this year, but we do it forever. Now, the current budget projection of $150 billion deficit for next year would turn into a $600 billion surplus. That sounds like a lot of money, and in fact, it would be surpluses for the next few years, but we would still accumulate surpluses too slowly over time to actually fix Social Security and Medicare. We'd actually be stillin net present value, be in the hole by $3.2 trillion.
So the problems facing our country are huge. So we need to do more than just balance the budget today. We actually need to make large changes that place Social Security and Medicare in particular on a sustainable course.
Unfortunately the Government's budget documents are not forward looking this way. The $43 trillion imbalance is not being shown on the books. Instead, the budget simply directs the public's measure to debt held by the public, which is a backward-looking measure.
So my second point is that by focusing only on the traditional measure of the debt, this resolution could actually make it harder, even though I support the general principles, it could actually make it harder to reduce the Government's true liabilities facing our country. For example, the Social Security Commission, recently appointed by the President, recommended three different models. Each model would increase the debt held by the public, and so under the traditional focus of debt held by the public, things would look worse under those models. But each of those models would actually decrease future liabilities of the Government, which aren't being tracked right now in our accounting system, by more than the increase in the debt being held by the public. So the Government's position would actually improve overall. But because we only focus on the debt, we don't report the other liabilities, so that it actually looks worse, but it in fact would actually improve things.
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So current discussions about Social Security and Medicare reform start from a biased position because we only focus on one of the liabilities and ignore the rest, which again would be illegal in the private sector.
My third point is this. I support the general principles of this bill, but I ask you to go simply one step further, and first reform the accounting in order to get all the liabilities right. So I would ask you to expand the scope of this amendment in order to account, for example, for all the 43 trillion, and not just the 4 trillion.
In my written testimony, which is much more comprehensive, I have some ideas, in fact, particular ideas of exactly how to go about that.
But let me, in closing, simply make this remark. In the past year, we saw how dubious private sector accounting led to lots of problems, and then it's large cash flows for periods of time, only to be revealed much later on. And as a result, lots of pensioners and shareholders lost lots of money, and sometimes the Government's doing that right now. We're hiding massive liabilities and who's going to pay the price for future generations? We, right now, have to make massive cuts. And so I think the time to act really is now, and for the Government to show by example. Thank you.
[The prepared statement of Mr. Smetters follows:]
PREPARED STATEMENT OF KENT SMETTERS
Page 29 PREV PAGE TOP OF DOC Thank you Chairman Chabot and members of the Committee for the opportunity to speak on The Balanced Budget Amendment, H.J. Res 22. I support practically any effort to make it harder for one generation to pass large fiscal burdens to future generations, especially when it is not due to a recession or war. So I applaud the supporters of H.J. Res 22 in their efforts.
In order to significantly increase the effectiveness of this Amendment, I would, though, urge you to first reform the flawed cash-flow accounting system that is currently being used by the federal government and upon which H.J. Res 22 is necessarily based. The government reports that the national debt in 2003 was about $3.8 trillion in the form of government ''debt held by the public.'' But that number ignores massive imbalances in the Medicare and Social Security programs and the government's other programs. When the liabilities associated with those programs are taken into account, the nation's fiscal policy is currently off-balance by over $43.4 trillion in present value, a number that is not reported in standard budget documents. So, a balanced budget amendment that fails to include the present value of the future shortfalls would miss over nine-tenths of the burden that must be paid in the future in the form of tax increases, benefit cuts, or both. In fact, by focusing only on the traditional measure of debt, as does H.J. Res 22, it could actually make it harder to reduce the true total liabilities facing our country.
In sum, I support an amendment to control the burdens being placed on future taxpayers. But I would urge supporters of H.J. Res 22 to go even further and include all of the liabilities that are currently ''off the balance sheet'' in the government's current accounting.
FOCUSING ON THE TRADITIONAL DEBT MEASURE
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MISSES MASSIVE BURDENS ON FUTURE GENERATIONS
As of January, 2003, the public held about $3.8 trillion of government debt. But that statistic only reflects the excess of past government spending over past revenue. To be sure, less debt is a good thing since it requires less future debt service. But it says very little else about the future. For example, a person who is currently free of debt still faces a problem if his future monthly rent is projected to consistently exceed his monthly income. Similarly, U.S. fiscal policy is promising current and future generations many more benefits than can be afforded.
Here are the numbers. Table 1 shows that projected future spending across all federal programs plus the amount of debt currently held by the public exceeds projected future revenue by $43.4 trillion in present value, as of 2003. That imbalance is over 11 times the $3.8 trillion debt held by the public that the government officially reports. $35.5 trillion of this $43.4 trillion imbalance stems from Medicare (Parts A and B) alone while Social Security accounts for another $7.2 trillion. The rest of the government is in relatively good shape and has an imbalance of only $0.68 trillion. These estimates were made with a detailed model developed by Jagadeesh Gokhale and myself during our time in the Bush Administration. They conform to the Administration's newest economic and demographic assumptions, as just released in the President's 2004 budget, and they incorporate all of the President's new proposed policies, including, for example, his new tax reduction plan and prescription drug plan.
By ''present value,'' we mean that all future spending and revenue are not only reduced for inflation but are additionally discounted by the government's (inflation-adjusted) long-term borrowing rate. This calculation allows us to determine how much money the government must come up with immediately in order to put fiscal policy on a sustainable course. Alternatively, the government must make cuts or increase revenue totaling more than $43.4 trillion in future years so that, when discounted to today, the sum of those cuts and extra revenue equals $43.4 trillion.
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The current fiscal imbalance is so large that it needs to be put into context. As an example, Table 1 shows that the government could, in theory, put the country on a sustainable course by raising the payroll tax on all uncapped earnings by 16.3 percentage points starting in 2004 and lasting forever. That would forever more than double the amount of taxes that are already being paid by employees to the Social Security and Medicare systems and the dollar-for-dollar matching paid by their employers. But even this calculation is conservative in that it assumes that taxes are raised on uncapped earnings, which is a larger tax base than used by Social Security. If capped earnings were taxed, an even larger tax rate would be needed.
Waiting just four years (until 2008) to implement this type of tax hike would require a permanent tax increase of 17.4 percentage points to close an even larger imbalance of $51.5 trillion. The fiscal imbalance grows by about $1.5 trillion each year between 2004 and 2008 (Table 1). That number is about ten times the deficit that the government officially projects for 2004. As with government debt, the fiscal imbalance grows with interest if no reforms are taken.
Such tax increases, of course, would probably put our economy into a tailspin. And so the above example is not intended as policy advice. But these calculations show the magnitude of the current fiscal imbalance and emphasize the need for real reform today. The longer the delay in reforming the nation's fiscal policies, the more drastic are the changes required.
Let me describe the current $43.5 trillion shortfall another way. Instead of raising payroll taxes, suppose we eliminate half of the rest of the federal government in 2004 except for Social Security and Medicare. In particular, we eliminate half of the federal government's spending on the military, homeland security, roads, education, veteran's affairs, agriculture, labor affairs, NASA, commerce, law enforcement, Medicaid, etc.everything expect for Social Security and Medicare. And we do this not just in 2004 but forever. Also suppose that we don't change federal taxes so that people continue to pay taxes as projected. Now, for example, the $150 billion deficit projected for 2004 would turn to a $600 billion surplus! That sounds like a lot of money. But we would still accumulate surpluses too slowly over time. In particular, we would still be left with a fiscal imbalance of about $3.2 trillion. In other words, shutting down half of the rest of government forever is not enough to put the U.S. fiscal policy on a sustainable course.
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We need to do more than just balance the budget today. We need to make large changes that place Social Security and Medicare, in particular, on a sustainable course in order to avoid placing huge burdens on future generations in the form of higher taxes or reduced benefits.
THE FOCUS ON THE TRADITIONAL DEBT MEASURE
MAKES IT HARDER TO REDUCE LIABILITIES
And so why don't we see real reform yet? The reason is that, unfortunately, the government's budget documents are not forward looking. The $43.4 trillion imbalance is not shown in the official budget. Instead, the budget directs the attention of the public and policymakers to the level of government debt, which, in turn, creates a bias against reform.
To understand the budget's current bias against reform, suppose that individuals are given the option to invest some of their payroll contributions into personal accounts that they would own and control. In exchange for this option, a person's Social Security benefit is reduced one dollar in present value for each payroll dollar invested. The retirement benefits of those choosing personal accounts, therefore, would be composed of reduced Social Security benefits plus additional income derived from their personal account assets.
Because those currently covered under Social Security's pay-as-you-go system must still be paid their benefits, government borrowing would increase. Under the traditional focus on government debt, therefore, this reform would appear unfavorable. But debt interest is just one component of the government's liabilities. The government's liabilities also include future Social Security benefits, which would decrease under this reform. In fact, future Social Security liabilities would decrease by exactly the same amount as the increase in the debt. The government's true financing position, therefore, would remain unchanged by this reform.
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In other words, current discussions about reform start from a biased position since even a neutral reform looks bad under current budgeting. In fact, the government's failure to properly account for future shortfalls is the culprit behind the popular myth that creating personal savings accounts requires a large ''transition cost.'' As the above reform experiment shows, it is possible to give people choice and control over their assets without any transition costs when properly measured. Of course, a ''transitional investment'' is needed to actually increase national saving.
Now let's drive the point home by modifying this example. Suppose that future Social Security benefits were now reduced by a little more than one dollar for each dollar of payroll a person invests into her personal account. This example is similar to Model 1 of the President's Social Security Commission. Many people might choose this plan in order to have more control over their retirement resources, freeing them somewhat from a risky government plan. But from the perspective of policymakers, this reform would also increase the government's debt since the government still needs resources in order to meet current benefit obligations. The government's true fiscal imbalance, however, would actually decline immediately under this plan because future Social Security obligations would fall by more than the increase in government debt.
The traditional focus on government debt, therefore, creates a bias in decision-making against potential reforms that could actually improve the government's financial position. A more complete accounting, which explicitly recognizes the future net obligations of Social Security and Medicare as well as the rest of government, would help remove this bias. Hence, before the Constitution is amended to balance the budget, the government's outdated accounting methodology needs to be reformed to include future liabilities as well.
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IMPROVING THE GOVERNMENT'S ACCOUNTING METHODOLOGY
Table 1 captures the key ingredients that any thorough budget measure must include. Table 1 has three key features:
1. It decomposes the fiscal imbalance into that On Account of Living and Past Generations as well as that On Account of Future Generations.
2. It covers all government outlays and revenue sources.
3. It discounts federal outlays and revenues across all future years.
Let me expand on each of these three points.
Generational Decomposition of Fiscal Imbalances
Table 1 shows that Social Security's $7.2 trillion imbalance as of 2003 is caused by large transfers to living and past generations. In particular, past and living generations are projected to receive $8.9 trillion more in benefits in present value than they have paid and will pay in taxes. In other words, the government promised these generations much more in the way of benefits than it collected from them in taxes. In contrast, future generations are projected to pay $1.7 trillion more in taxes in present value than they will receive in benefits, and so they help reduce the imbalance a little bit. But their net contribution of $1.7 trillion is not enough to overcome the $8.9 trillion ''overhang'' left over from the windfall given to past and current generations. For Social Security to fully return to balance, living and future generations must receive fewer benefits and/or pay more taxes equal to the difference, or $7.2 trillion, in present value.
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In sharp contrast, Table 1 also shows that a majority of Medicare's imbalance as of 2003 is on account of future generations. Future generations are projected to contribute $19.6 trillion to Medicare's total imbalance of $35.5 trillion while past and living generations contribute about $16 trillion. The reason that future generations contribute more to Medicare's fiscal imbalance is due to the projected rapid growth in future medical expenses per capita. As with Social Security, either current or future generations must receive fewer benefits or pay more taxes$35.5 trillion worth in present value in this casein order to restore Medicare to sustainability.
At first glance, one might think that this generational decomposition is just ''extra information'' that is not crucial to the creation of an honest budget measure. That conjecture, though, would be very wrong. The decomposition information serves two related purposes:
(i) THE GENERATIONAL DECOMPOSITION REVEALS FUTURE BURDENS THAT WON'T BE DETECTED BY EITHER THE FISCAL IMBALANCE OR DEBT MEASURES.
The fiscal imbalance measure only indicates the degree to which policy is unsustainable; it, alone, does not indicate future burdens. Without the generational measures, policymakers could still creating large future burdens in a hidden manner. So, all the measures are needed.
As an example, suppose the U.S. Congress increased Medicare benefits and financed it by hiking payroll or other taxes by an equal amount each year. In other words, this new benefit is financed on a pay-as-you-go basis. This policy would not change Medicare's fiscal imbalance because the new outlays are exactly matched by new revenues. As a result, the federal government's total fiscal imbalance would not change either. The debt held by the public would also not change since the new benefit is exactly financed by new revenue.
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But this policy would still reduce the resources of future generations. The reason is that living retirees at the time of the new policy would gain from the new benefit for which they paid nothing during their working years. Also, many older workers at the time of this policy change would gain since they only have to help finance the new benefit for an abbreviated amount of time. Some younger workers and most future generations, however, would be worse off because they must pay for the benefit during a larger fraction of their working life. Since their payroll contributions are being transferred to the elderly rather than saved and invested, they lose a large amount of investment income that could have been derived from these resources.
In the context of Table 1, this new policy would increase Medicare's imbalance On Account of Living and Past Generations by the same amount as it would decrease Medicare's imbalance On Account of Future Generations, leaving its overall fiscal imbalance unchanged. In other words, living and past generations would receive a windfall that is directly offset by reducing the resources available to future generations. This redistribution can be captured only by showing the contributions of different generations to the overall imbalance.
(ii) THE GENERATIONAL DECOMPOSITION ALLOWS POLICYMAKERS TO MAKE MORE INFORMED DECISIONS WHEN DECIDING AMONG DIFFERENT SUSTAINABLE FISCAL POLICIES.
We can think of informed fiscal policymaking as involving two sequential steps. First, policymakers must decide on the set of possible fiscal policies that will place the nation's fiscal policy on a sustainable path, i.e., produce no total fiscal imbalance. The range is large. For example, policymakers could increase taxes, reduce benefits, or a combination of both. Also, these changes can be made immediately; alternatively, even more drastic changes could be made in the future. However, while each of these approaches can be used to produce a zero fiscal imbalance, each approach will typically yield a very different impact on the resources of each generation. For example, deciding to start decreasing the growth rate of Social Security and Medicare benefits today will be much more beneficial to future generations than increasing taxes over time. So the generational decomposition information helps policymakers decide among these options. The second step, therefore, is for policymakers to choose the specific plan among the set of sustainable policies that they believe produces the best tradeoff between generations.
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All Sources of Outlays and Revenues
Another key feature of the budget measure shown in Table 1 is that it includes all of the federal government's sources of outlays and revenues. At first glance, it might seem necessary to only include the Social Security and Medicare programs since those programs are the ones in the most trouble. But that approach would be a major mistake for two related reasons.
(i) REPORTING ONLY THE IMBALANCES IN THE SOCIAL SECURITY AND MEDICARE PROGRAMS WOULD ALLOW FOR BUDGET MANIPULATION.
Suppose, for example, that legislation were passed that committed some of the future general tax revenue to the Social Security and Medicare programs. Under the accounting statement shown in Table 1, the total federal fiscal imbalance would remain unchanged because the ''Imbalance of the Rest of Federal Government'' would increase dollar-for-dollar with the decrease in the imbalances for Social Security and Medicare. In other words, Table 1 would correctly show that nothing of substance was done by simply redirecting money from one account to another. However, if only the ''Imbalance in Social Security'' and ''Imbalance in Medicare'' were shown, it would incorrectly appear that this simple transfer improved things.
Another relevant example is the increase in Social Security payroll taxes during the mid 1980s. While these payroll tax increases clearly reduced the imbalance facing Social Security by increasing the size of the trust fund, a considerable debate among academics has emerged as to whether these payroll taxes really reduced the government's total fiscal imbalance. In particular, if the extra tax monies were actually spent by the rest of the government then any reduction in Social Security's imbalance may have been offset by an increase in the imbalance in the rest of the federal government. A comprehensive measure, therefore, would make everything clear.
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(ii) REPORTING THE IMBALANCE OF THE REST OF THE FEDERAL GOVERNMENT ALSO ALLOWS FOR MORE INFORMED POLICY DECISIONS
What ultimately matters for the issue of sustainability is the federal government's total fiscal imbalance. Still, understanding how that imbalance is divided between the different programs is informative. Notice, for example, that almost the entire federal government's fiscal imbalance is due to the Social Security and Medicare programs. The rest of the government is almost in balance, even though this measure includes the President's most recent tax proposals.
Indeed, Table 1 puts the President's most recent tax proposal in its proper context. Notice that the President's tax proposal does not produce a large Imbalance in the Rest of the Federal Government. Indeed, I hope that the President's plan will someday be followed by even more aggressive measures to reduce the marginal cost of investment in the U.S., including allowing companies to immediately expense all capital equipment in the year purchased. Eliminating the personal dividend tax along with a move to full expensing would effectively shift the U.S. tax system to a progressive-based consumption tax, which would promote investment while still preserving the important risk-sharing value of a progressive tax system.
Of course, there are some people who will argue that any surpluses in the rest of government could be used to help address the problems facing Social Security and Medicare. To be sure, these crippling programs could be helped somewhat in this manner.
Still, there is a certain irony to attempting to bail out Social Security and Medicare using general revenue: the very purpose of using an earmarked payroll tax for these programsand a fairly regressive tax at thatwas to create a sense of entitlement of pension-like benefits upon retirement. If we start making significant general revenue transfers, how do we differentiate Social Security and Medicare from a standard welfare program? Are people still ''entitled?'' Indeed, suppose that the tables where turned so that the Social Security and Medicare programs were in fine shape but the rest of government was not. Would it be okay then to raid the trust funds of these programs to pay for the rest of government? Presumably, those advocating general revenue transfers today would oppose robbing pensioners of their ''entitlements.''
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In any case, we cannot ''nickel and dime'' our way to saving Social Security and Medicare. We need serious reform of those programs. The costs and benefits of tax reform, national security, and other programs need to be basically decided on their own.
Including all Future Years
Table 1 also reports the imbalance associated with the federal government's fiscal policy across all future year, and not just over a fixed time window such as the next 75 years. There is widespread agreement among economistsboth politically conservative and liberalthat it is incorrect to look at only a fixed time window when computing the fiscal imbalance. All future years must be included: ignoring problems projected for years beyond a fixed time window incorrectly discounts the revenues and outlays in those years at a rate of infinity. To be sure, the President's 2004 Budget reports an $18 trillion fiscal imbalance for Medicare and Social Security over just the next 75 years. But that choice was due to a technical issue: the actuaries at the Centers for Medicare and Medicaid Services (CMS) and the Social Security Administration had not yet developed the tools for making longer-term estimates. There is widespread agreement in the Administration, in fact, that a fiscal imbalance measure must include all years.
The Social Security and Medicare Trustees' Reports show imbalances for those programs as a fraction of payroll for just a 75-year time horizon. Unfortunately, the 75-year horizon, therefore, has become a standard measuring stick in government, and so some historical background might be useful. Before 1965 (and, hence, before Medicare), the Trustees calculated the imbalances associated with Social Security's ''scheduled benefits'' based on all future years and not just 75 years. However, at that time, Social Security benefits were not indexed to prices and so they incorporated no inflation protection. Instead, Congress would pass legislation every couple years to increase the nominal value of benefits. As a result, it was widely known that the ''scheduled benefits'' associated with any particular law would not materialize as the actual level of benefits just a few years later. However, the Trustees are charged with describing the law as it stands, not with how they think it will evolve. But since the Trustees did not have that much confidence in their estimates, they decided to shorten the forecasting period to 75 years. Yet even they agreed that including all future years was the appropriate choice in theory.
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Today, retirement benefits, however, are now indexed for prices after a person reaches retirement. Moreover, shortly before reaching retirement, a person's Social Security benefit is automatically increased by an additional amount to account for the real wage growth over his or her lifetime. The practical motivation for using a truncated 75-year window, therefore, no longer exists. Indeed, after a thorough investigation and discussion, the Social Security and Medicare Trustees voted in November, 2002, to begin including in their next Reports the imbalance for the Social Security program, as calculated across all future years. They will have to revisit the issue, though, for Medicare in the future, once CMS develops the ability to make their own estimates.
INCORPORATING LONG-TERM LIABILITIES INTO THE AMENDMENT
I would be delighted to work with this Committee to ensure that a balance budget amendment would focus on a liability measure that is more comprehensive than the backward-looking debt measure. I believe that the following points should be part of any amendment:
1. The Office of Management and Budget as well as the Congressional Budget Office must produce an annual report that captures the information shown in Table 1. Require that Table 1 be calculated for any proposed legislation that would materially affect its contents.
2. For budget reports generated by the OMB, establish a group of Federal Budget Trustees that replaces the current TROIKA structure. Federal Budget Trustees would be composed of six Government Trustees (Director of OMB serving as Managing Trustee; Chairman of the Council of Economic Advisor; Secretaries of Treasury, HHS, and Labor; Social Security Commissioner) as well as an equal number of Public Trustees (half appointed by the White House and half appointed by Congress). Each Public Trustee would serve one term for six years. Each Trustee would have one vote with any action approved by the majority. A similar structure could be implemented for budget reports generated by the CBO. Similar to the current Social Security and Medicare Trustees, the Federal Budget Trustees would be charged with deciding the underlying economic and demographic assumptions. Policy decisions, of course, would still be left to the White House and Congress, respectively.
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3. By 2008, Congress must pass legislation that produces a zero Total Federal Fiscal Imbalance. All subsequent legislation cannot produce a positive Total Federal Fiscal Imbalance unless approved by 3/5 of Congress by rollcall vote. Even in the case of a war or a recession, Congress must pass legislation specifying how they plan to pay for the costs in the future in order to produce a zero Total Federal Fiscal Imbalance, unless overridden by a 3/5 majority.
4. After 2008, any decrease in the Total Federal Fiscal Imbalance On Account of Future Generations caused by policy changes must be approved by 3/5 of Congress by rollcall vote. This requirement will ensure that Congress does not attempt to achieve a zero Total Federal Fiscal Imbalance by proposing unrealistic benefit cuts or tax increases on future generations. It would also make it harder for Congress to pass pay-as-you-go financed programs that hurt future generations. But, unlike a prohibition on annual unified deficits, this restriction would still allow Congress, for example, to use debt to reduce future Social Security liabilities, and it also permits using automatic stabilizers during recessions.
Currently, every State in the U.S. except one has a constitutional or a statutory restriction limiting the ability of those states to run deficits. Between 1970 and 1990, these budget rules appear to have been effective in controlling government spending in those States with the most restrictive requirements.(see footnote 12) In more recent years, however, many States have effectively raided their public-employee pension funds using so-called Pension Obligation Bonds and other tricks. The evidence from the States, therefore, shows that (i) budget rules can indeed be effective in controlling spending but (ii) these rules must be specified in a way to prevent manipulation.
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Similarly, a federal balanced budget amendment to the U.S. Constitution could be effective in controlling the federal government's spending. But unless the scope of H.J. Res 22 is expanded to include all of the government's future liabilities beyond debt service, H.J. Res 22 is open to the same manipulation by future members of Congress. As shown earlier, the debt held by the public is a backward-looking measure that misses over nine-tenths of the burden that must be paid in the future in the form of tax increases, benefit cuts, or both. Moreover, by focusing on this traditional but narrow debt measure, H.J. Res 22 could make it harder to reduce these other liabilities unless the scope of H.J. Res 22 is explicitly expanded to include them.
The time for recognizing these liabilities could not be more appropriate. We have seen in the past year how dubious private-sector accounting hides large cash flow shortfalls for a period of time, only to be revealed later at a great loss to pensioners and other shareholders. Congress and the President responded by passing the Sarbanes-Oxley Act of 2002. The federal government now needs to lead by example by getting its own books into shape as well.
Fortunately, some members of the Administration are indeed taking notice. For example, in a November 14, 2002 speech in Columbus, Ohio, Treasury Undersecretary Peter Fisher argued that ''we need to bring this forward-looking understanding out of the shadows. We need to shine the same spotlight on it that the annual deficit and total debt receive in our government's budget rituals.'' Both The Office of Economic Policy at the U.S. Treasury and OMB are now actively engaged in studying ways to more properly account for the federal government's future liabilities. Also, as mentioned earlier, the Social Security and Medicare Trustees recently voted to show longer-term shortfalls for the Social Security program in their annual report, although they have not yet taken up the matter for Medicare. Finally, Alan Greenspan has recently endorsed reforming the budget to account for future liabilities. But, until future shortfalls are properly documented and become the primary basis of analyzing policy, reforms that address the nation's $43.4 trillion (and growing) imbalance could remain on hold.
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So, in sum, I strongly applaud the efforts of supporters of H.J. Res 22. I urge them, however, to go even further and expand the scope of H.J. Res 22 to include all of the federal government's liabilities besides just debt service.
Kent Smetters served as Deputy Assistant Secretary of Economic Policy at the U.S. Treasury from June 2001-September 2002 where he worked on budget reform, Social Security reform, and coordinated The Social Security and Medicare Trustees Working Group that reformed the annual Trustees' Reports. He returned to The Wharton School in September, 2002. He can be reached by email (email@example.com) or by phone (2158989811).
Mr. CHABOT. Thank you, Dr. Smetters.
STATEMENT OF RICHARD KOGAN, SENIOR FELLOW, CENTER ON BUDGET AND POLICY PRIORITIES
Mr. KOGAN. Thank you, Mr. Chairman, Mr. Nadler. It's a pleasure to be back to the House of Representatives, even as an outsider.
I have 8 points that I'd like to make in my testimony. I'll try to get through them very briefly. To supplement my testimony, however, I've attached two reports that the Center on Budget and Policy Priorities issued in 1997 and a series of 11 graphs, which I've attached. With your permission, Mr. Chairman, I'd like them introduced into the record.
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Mr. CHABOT. Without objection.
Mr. KOGAN. The graphs and charts bear on many of the statements that the Members and the witnesses
Mr. SCOTT. Do we have these?
Mr. NADLER. We have your four pages of testimony, but that's it.
Mr. KOGAN. I believe copies of my testimony are in the worst possible place, which is over there, rather than in front of you.
Mr. CHABOT. We'll hold your time. We'll give you an extra however long it takes to pass these out.
Mr. KOGAN. Thank you.
Mr. CHABOT. Okay. You can proceed.
Mr. KOGAN. Thank you, Mr. Chairman.
First of all, I'd like to mention this amendment is far more restrictive than any rules placed on families, States, counties, or businesses. No State, local government, family, or business is required to prohibit borrowing under all circumstances. Every family borrows to finance the purchase of a home. That's what a mortgage is. Every State, city, or county borrows to pay for school, road, or hospital construction. Growing businesses borrow to finance new capital construction.
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Worse yet, this amendment would prohibit dipping into past savings. Under this amendment, this year's costs must be covered entirely by this year's income. This would mean that a family in retirement could not draw on its savings but would, rather, have to draw on its income in that year. It would mean that a family could not draw on its savings to send a child to college. It would mean that a business could not use retained earnings from previous years to invest and grow. It would mean a State could not use a rainy-day fund. This is far too restrictive.
Second, such a restrictive amendment is poor public policy. The Administration is right when it says that during a recession or during a war or during some major national emergency, it would be wrong to insist on balancing the budget in the short run. Among other things, particularly in a recession, it would kick the economy when it was down; it would withdraw purchasing power. Whether we withdrew purchasing power by raising taxes or by cutting spending, it would push the economy even more into a bad situation.
In Graph Number 1, you can see that from 1929 to 1933, when we valiantly tried to balance the budget by raising taxes and cutting spending, we created the Great Depression.
Third, the experience of the last 20 years illustrates that setting dollar targets of the outcome, which was what this doesthis requires a balanced budget each yearis not as good a method of trying to keep budgetary controls and budgetary restraint as setting dollar targets for the cost of legislation. The pay-as-you-go rule said that all tax cuts had to be offset, that all entitlement increases had to be offset, that appropriations were capped. It did not say what the outcome had to be, but by following the pay-as-you-go rule and the discretionary caps for 8 years, we also ended up with a balanced budget, something that we did not do under Gramm-Rudman.
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Fourth, every State has a political system in which the Governor is exceptionally powerful compared with the legislators. In part, this is needed so that Governors can deal with budgets when they fall out of balance in the middle of the term. I prefer having the House of Representatives and the Senate be powerful, not the President. I don't want this institution to become merely a rubber stamp.
Fifth, it's possibleand I think this Committee particularly is well suited to look at the issuethat a balanced budget constitutional amendment, being a constitutional amendment, has the force of law, force of super law. If it is to be meaningful, if it isn't merely to be something that the courts will set aside and say it's a political question or a non-justiciable issue, then it would have to be enforced. If Congress did not waive the balanced budget requirement by supermajority, did not raise taxes by majority vote, did not cut spending by majority vote, then the courts would have to intervene. We have no idea whether they would do this or how they would do this, but one of my attachments went through all of the possibilities that I could imagine at the time, for example: a court-ordered surtaxes; court-ordered benefits cuts; court-ordered enactment of tax increases or spending cuts that the President had vetoed; court-ordered enactment of tax increases or benefit cuts that Congress had designed but failed to pass; court-ordered invalidation of appropriations bills, entitlement bills, and tax cuts, in reverse chronological order; or maybe contempt citations. We should consider that seriously if we want to put a rule, no matter how good a rule, into the Constitution.
Let me sum up quickly. I'm sorry that I'm so slow.
Page 47 PREV PAGE TOP OF DOC Sixth, there are wide varieties Congress could use to evade the balanced budget amendment if it wanted towe learned all about them during the Gramm-Rudman I and Gramm-Rudman II years: offloading Federal programs onto GSEs; timing shifts; contingent liabilities; and my particular favorite, unfunded mandates. Ultimately, this bill could be knownif it were enacted, could be known as the Unfunded Mandates Act of 2003.
Seventh, there's the public policy question. I've said that balanced budgets is poor economics under certain circumstances, in my opinion. The public policy question suggests and Mr. Smetters' testimony suggested that in the current circumstances, with the overhang of the baby-boomer retirement, we should be running surpluses. And I agree, were it not for the recession. When we're out of the recession, I think we should be running surpluses in the current situation. But situations change. We don't always have baby-boomer overhangs. We don't always have a low national private savings rate. We should not put into the Constitution an operational rule that might be right for current circumstances but is not a permanent matter of law, like the right to free speech.
And, finally, this public policy discussion and the disagreement on this panel and on this Committee illustrates that this is fundamentally a democratic question, not a constitutional question. To make it a constitutional question implies that people with some public policy viewpoint will have fewer legal rights; they will have their votes counted less than other people's votes. Nowhere in the Constitution does that exist, except that Members of Congress are subservient to the President when it comes to counting votes because he gets to enact vetoes that is hard for you to override. No public policy position in the Constitution is favored over any other public policy position.
Page 48 PREV PAGE TOP OF DOC [The prepared statement of Mr. Kogan follows:]
PREPARED STATEMENT OF RICHARD KOGAN
The question before us today is whether the Constitution should be amended to require that the federal budget be balanced every year. To supplement my testimony, I have attached a report the Center on Budget and Policy Priorities issued in 1997, the last time Congress debated a constitutional amendment that would have mandated a balanced budget every year.
First, let me very briefly explain how restrictive the text of the current proposed amendment really is. By requiring that each year's expenditures be covered by that year's income, the amendment would preclude borrowing, even during times of unusual duress, such as wars or recessions; moreover, it would effectively preclude saving for the future, because the money saved in the present could not be used to cover future costs.
No state or local government, no family, and no business is required to operate under such restrictions. Every family borrows to finance the purchase of a housethat's what a mortgage isand many borrow to finance higher education; every state, city, or county borrows to pay for school, road, or hospital construction or parkland acquisition; and most growing businesses borrow to finance new capital construction or acquisition.
Moreover, the amendment would prohibit dipping into past savings, since under the amendment this year's costs must be covered entirely by this year's income. Yet most families dip into savings to pay for a child's college education and certainly to cover costs during retirement; every state that ''balances'' its budget in fact can use its rainy day fund to help cover costs during a recession; and businesses often use retained earnings from prior years to finance expansions. This amendment makes saving for the future pointless because the saved money could never be used: it would be unconstitutional to use rainy day funds, or to use the accumulating assets in the Social Security trust fund to help cover the costs of the baby boomers' retirement. In effect, it would prohibit this generation from building up public savings, or paying down public debt, for the express purpose of providing assets to make the burden on future generations lighter.
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Second, such a restrictive amendment is truly inferior economicsit would require the government to reduce consumption during recessions, thus slowing the economy even further, throwing more people out of work, and in some cases running the risk of turning a recession into a full-blown depression. This Administration is exactly right when it says that Congress should not raise taxes during a recession. By the same token, Congress should not cut public spending during a recession. Either action takes purchasing power out of the hands of consumers at exactly the wrong time. In effect, the amendment would ban automatic stabilizers, such as unemployment compensation. Likewise, the amendment would give the seal of approval to over-stimulating the economy during an inflationary boom, risking an acceleration of inflation that could be seriously destabilizing.
Even though the states operate under much less restrictive rules, the actions states are forced to take during the current recessionraising taxes and cutting education, health care, social services, and infrastructureare harming the economy and slowing the recovery; this fact makes it doubly important to maintain robust automatic stabilizers at the federal level.
Third, the experience of the last twenty years illustrates that setting targets for a budget surplus, or deficit, or balance, is not workable but that limiting the cost of legislation works far better. From the mid 1980s through 2000, three Presidents and many Congresses gradually worked to undo the damage of the first half of the 1980s, mostly by taking hard votes but partly by writing statutory rules or rules of House and Senate procedure providing guidance that Congress very largely followed. Especially after Gramm-Rudman-Hollings I and II were replaced by the far more workable system of appropriations caps and a rule of budget neutrality for tax and entitlement legislationthe so-called PAYGO rulethe budget moved from deficit to surplus. The relative failure of GRH I and II is important because those laws, like the amendment before us, attempted to set a specific fiscal target for the budget. The relative success of caps and the PAYGO rule illustrates that targeting the cost of legislationrather than the overall level of the surplus or deficitis a far superior road to the desired result. If this subcommittee is truly concerned about future deficits, it should work with the Budget and Rules Committees and the Administration to re-impose reasonable appropriations caps and the rule of budget neutrality. More importantly, Members should eschew any new tax cuts or entitlement increases, such as a prescription drug benefit, except to the extent that they are fully offset.
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Fourth, almost every state has a political system in which the governor is inherently much more powerful than the legislators, most of whom are part-time legislators with other jobs. This is a logical consequence of allowing governors great freedom to implement or not implement elements of the budget, depending on circumstances, given various state balanced-budget requirements. By analogy, this amendment could lead to a vast strengthening of presidential powers and a weakening of congressional authority. This worries me; Congress is not very efficient, but its very inefficiency was deliberate, to minimize hasty and ill-considered actions. This has worked well for a few centuries, and I see no need to fundamentally change the balance of power.
Fifth, it is possible that power won't be shifted from the Congress to the President, but rather from the Congress and President to the courts. My guess is that the courts would find the amendment unenforceable, making this exercise mere show. But if the courts believed the Constitution prohibited an unbalanced budget except to the extent Congress voted by supermajority to approve it, then the risks of this amendment would be profound. We have absolutely no way of knowing what a court would do to balance the budget when Congress refused, or more likely, when the budget fell out of balance despite Congress' best efforts. I have attached a paper raising many of the legal avenues that can be imaginedcourt-ordered surtaxes or benefit cuts; court-ordered enactment of tax increases or spending cuts that the President had vetoed; court-ordered enactment of tax increases or benefit cuts that Congress had designed but had been defeated; court-ordered invalidation of appropriations bills, entitlement increases, and tax cuts; or contempt citations.
Sixth, whether the Courts will enforce the balanced budget amendment or not, there are a wide variety of gimmicks Congress can use to evade it. Among these are borrowing by another name, e.g. lease-purchase contracts; paying for costs through contingent liabilities, e.g. loan guarantees or insurance contracts; timing shifts that move costs from the present to the future, e.g. back-loaded IRAs and the new so-called ''savings account'' proposals; off-loading federal programs onto nominally independent ''government-sponsored enterprises'' such as REFCORP; and the perennial favorite, unfunded mandates on states, localities, businesses, and individuals. In fact, if this amendment were enacted, it could ultimately be referred to as the Unfunded Mandates Act of 2003.
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Seventh, let us leave aside the constitutional question for the moment and ask the public policy question. Should the Federal Government aim to balance its budgets? Clearly not during a recession, as I have said. How about on average over the business cycle? Even here, I think that a balanced budget would be the wrong general target. A better target would be to run surpluses, not balance, for the remainder of the decade, in an attempt to pay off much or all of the debt before the baby boom generation retires. The purpose, in this case, is to reduce or eliminate future federal payments for interest on the debt and thereby allow future tax revenue to be used entirely to pay for public benefits and needs, such as Social Security or defense. Because the federal government is a major supporter of people in retirement and because there will be a bulge in retirees at the end of the decade, federal costs will inevitably grow starting in about a decade. If we can reduce federal costs for interest at the same time that the federal costs of Social Security and Medicare are growing, we can afford part of the increased costs of Social Security and Medicare without having to raise taxes.
Thus, the question is whether we should pay somewhat higher taxes now (when I am paying them) in order to pay off the debt, or wait a decade or more to raise taxes, when I will be retired but my children will be paying taxes. It seems to me only fair that I and my generation be willing to reduce the tax burden on my children and their generation by being willing to pay somewhat higher taxes now so that we can reduce or eliminate the debt before we retire.
In short, if we are discussing budget policy rather than artificial budget rules, we happen to be in one of the rare decades in which surpluses are generally a better goal than balanced budgets. A surplus doesn't mean we are collecting ''extra, unneeded'' taxes; it merely means that the taxes we are collecting now will be needed for our future retirement.
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This policy discussion illustrates one reason the constitutional amendment is a bad idea: circumstances change over time. During some decades, balance might be generally a good goal, but one should also take into account the private saving rate and needs of the future. In the particular circumstance we are in, where we can predict with certainty that the need for public expenditures will increase in the future compared with current needs, it makes sense for the nation to save for the future by paying down debt. Unlike the right to free speech or the right to a lawyer (which can be viewed as a permanent right), the appropriate general target for fiscal policy depends on circumstances, so it is inherently wrong to enact any such target into the Constitution.
Finally, a constitutional balanced budget amendment is fundamentally unworthy of a democracy. Our Constitution currently allows every public policy questionwar versus peace, the levels and types of taxes, the purposes and amount of public expenditures, what constitutes a federal crime, whether to admit a new state to the Unionto be decided by majority vote. (True, the rights of individual citizens are protected against a majority decision to discriminate, and it takes a 2/3 vote to override a presidential veto. But these aspects of the Constitution do not favor one set of public policy preferences over any other.) Under a constitutional Balanced Budget Amendment, citizens with one preference on public policy (let us say, those who favor a tax cut or an increase in unemployment benefits during a recession, or merely allowing revenues to fall naturally and the normal unemployment compensation law to continue to operate) would have fewer legal rights than citizens with the opposite viewpoints because they would need more votes to win. This is so inherently unfair that it should be rejected out of hand. Equal legal rights, including the right to have our votes count the same amount as anyone else's votes, is fundamental.
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Page 54 PREV PAGE TOP OF DOCKogan26.eps
Mr. CHABOT. Thank you very much.
STATEMENT OF WILLIAM W. BEACH, DIRECTOR, CENTER FOR DATA ANALYSIS, JOHN M. OLIN SENIOR FELLOW IN ECONOMICS, THE HERITAGE FOUNDATION
Mr. BEACH. Mr. Chairman, Congressman Nadler, I'm delighted to be here today to join my colleagues on this panel to talk about the balanced budget, balanced budget amendment, and urge you to do that, no matter whether we have an amendment or not.
I'm going to summarize three points that are in my written testimony, and my written testimony should contain an attachmentand I hope it doesof a paper by my colleague, Brian Riedl, which is central to the written components of my testimony.
I'd like to talk about three different headings: the first, sort of a constitutional principle of what I think really does motivate a republican form of Government when you have balance as an objective, and that is, constitutional debate on priorities. Secondly, I'd like to remind the Committee about the really critical statistical evidence of where we are right now on spending and on revenues. The numbers really do get worse every day, and I think it's important that we move not only in the appropriations and budget process, but on the constitutional side as well. And, finally, I'd like to make one note about the horse and the cart and how important it is to keep the health of the horse up if the cart is going to continue to get larger.
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I really do think that the 108th Congress can work for the long-term well-being of those who elected it in a number of ways: strengthening national defense, providing needed tax relief to keep the economy growing and to keep it strong, and enact key reforms that affect the country's neediest citizens. Those are things that must be done. But this Congress does have a historic opportunity, and that is to live in history as the Congress that enacted or passed on to the States for their ratification a balanced budget amendment. And there are many reasons why I think this is a crucial thing for us to have.
The Constitutionthe way in which our republican form of Government operatesthis message from the outside consultants. The way, in my view, our Constitution operates to promote and extend republican Government is to have great debates over policy priorities that are pressing in the public's mind. But one of the problems with having great debates now is that the Congress and the Administration, the Federal Government, is able to avoid many policy matters by borrowing their way out of a debate.
Now, at the State leveland many of you have State experience, as I do, where we are required to keep the balance in budgetthe budget in balanceyou find that at times the legislature must grapple with the differences in priorities because it has no choice but to do so. And if it is not done in the legislative body, then the Governor imposes choices, which is another way of doing it.
And so I think from a constitutional health standpoint, something that imposes balance or requires it or motivates it will go to the central heart of our republican form of Government, and that is that the public can always count on its representatives carefully debating and vigorously debating the differences in priorities. And why is this important?
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Well, right now we have a big problem on the spending side. Let me remind you of a few reasons why you should be concerned.
The outlays of the Federal Government today are slightly more than 23 times greater than they were in 1960. Government spending, after adjusting for inflation, has increased nearly five-fold since 1960, while the population has grown by a factor of 1.6. Per capita Federal spending now stands at $7,600. In 1960, per capita Federal spending stood at $510.
Total publicly held debt in 1960 was $236.8 billion. In 2003, it equals $3.9 trillion. And this Congress and the preceding Congress and the Congress just before that must bear a great deal of responsibility for these awful numbers. Republicans and Democrats alike share this.
In the last 4 years, Federal spendingthat's Republicans and Democrats, the last 4 years, Federal spending has increased by $800 billion. The last 4-year period when Federal spending increased by that rate was at the darkest moment of World War II. And I think what we're looking at now in the current budget being considered is yet more burden for the horse to carry. So let me sum up by talking about the horse.
The horse, of course, is the general public that produces the revenues, and the cart is the increasing size of Government that you're asking that horse to pull. Now, we've been doing a good deal of work on what would create a better environment for the economy, looking at what the President's proposed, we're just about to finish work on what Senator Daschle has proposed in S. 414. Both bills move the economy to a higher level of activity. And why is that important for this consideration, for this group?
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It's important because if you don't move forward on a balanced budget, then you must move forward on steps to move the economy to a higher level of activity. The President's bill creates about a million jobs per year beginning right away. It drops the unemployment rate throughout the forecast period of the next 10 years. Payroll tax revenues increase significantly during this period, which strengthens the trust fundsall of which go to the notion of the deficit, all of which go to the notion of debt, and that goes to the central focus of what we're here to talk about, the balancing of the budget.
Thank you very much.
[The prepared statement of Mr. Beach follows:]
PREPARED STATEMENT OF WILLIAM BEACH
I want to begin my testimony today by thanking this Subcommittee on the Constitution for providing an opportunity for me to testify on behalf of a balanced budget amendment to the U.S. Constitution. The opinions expressed in this testimony are mine alone and do not necessarily reflect those of The Heritage Foundation.
There are many things that the 108th Congress can do for the long-term well being of those represented by the Members: among them are strengthen our national and domestic security, provide tax relief that yields a stronger economy, and enact needed reforms to key programs that affect the country's neediest citizens. However, this Congress certainly would secure its place in history and fulfill its obligation to govern for the general good if it referred to the states for ratification an amendment to the Constitution that requires the federal government to operate within a balanced budget.
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My testimony today is divided among three headings: 1) the constitutional importance of vigorous debate over competing priorities; 2) the statistical evidence that supports a rapid movement toward a balanced budget amendment; and 3) the role that dynamic revenue estimation plays in the process of achieving annual budget balances.
The place of spending debates in the health of the Constitution. I know that many fiscal conservatives view the balanced budget amendment as justified principally on financial grounds. It is virtually uncontroversial that governments at all levels should practice the spending disciplines of well-run businesses. This practice is especially important at the federal level, if for no other reason than the enormous influence that federal spending has on other governments and the economy generally. Spending limitations encourage better accounting controls and auditing processes, which assure that the monies allocated to address the priorities of voters are, indeed, well spent.
However, I believe that a larger, constitutional goal is served by amending the constitution to require a balanced budget: representative government works only as well as it allows a full airing of its citizens' divergent views, particularly in open debates over competing public policy priorities. Without a way to limit spending, such debates are unlikely to occur.
Suppose an extreme situation in which there exist no limitations on the ability of the federal government to spend taxpayers' funds except the capacity of taxpayers to produce revenues. In such a world, no one's spending goals would go unachieved in the short run. There would, as a consequence, be no debate over the direction the nation should go in meeting the needs of its elderly citizens, its educational systems, or its national defense. And, without debate and the deep social, economic, and policy inquiry such debate engenders, we would likely be unable to sustain our republican form of government.
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Of course, such an extreme world cannot exist for long, if for no other reason than boundless spending by government inevitably destroys the economy out of which revenues flow. The point of this scenario, however, applies equally well to more realistic gradients of the extreme case. The ability of a government to avoid hard decisions about priorities because it can borrow to meet its revenue shortfalls also diminishes debate over competing views of our country's future and current priorities. This borrowing ability may, as well, enable organizations with powerful lobbying capabilities to squeeze millions of dollars in subsidies from Congress and the Administration with the public scrutiny that debate can produce.
Are there reasons for being concerned? These constitutional considerations should be justification enough to adopt a balanced budget amendment, even if reality had yet to catch up with the possibilities outlined above. However, the evidence is mounting that those fiscal disciplines that may once have protected these vital constitutional processes have yielded utterly to growth in spending that far exceeds required levels.
Let me highlight a few facts:
The outlays of the federal government today are slightly more than 23 times greater than they were in 1960.
Government spending after adjusting for inflation has increased by nearly five fold since 1960, while the population has grown by a factor of 1.6.
Per capita federal spending now stands at $7,600. In 1960, per capita federal spending stood at $510.
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Per capita share of publicly held federal debt now stands at $13,720. In 1960, this share stood at $1,310.
Total publicly held debt in 1960 was about $236.8 billion. In 2003 it equals about $3.88 trillion.
Worse news on the debt is on the way. By 2020, most of the baby boom generation will be retired and drawing monthly checks from Social Security. By 2030, the total Medicare enrollment will be more than double the current Medicare population. Neither Medicare nor Social Security is expected to survive the onset of the baby boom without massive infusions of additional cash or major structural reform. The unfunded liabilities of Social Security alone are now in excess of $21 trillion over the next 75 years.
The recent Congresses have shown little will to reverse or even slow this explosion in federal spending. The 107th Congress completed a four-year spending spree that exceeds every other four-year period since the height of World War II. Between 2000 and 2003, federal spending grew by $782 billion. This growth in spending is equivalent to $73,000 in household spending, which, again, was exceeded only during the darkest hours of the Second World War.
I have attached a policy essay to this testimony by my colleague Brian Riedl, who details this nearly unprecedented explosion in outlays. If the spending record of the period 1960 through 2000 fails convince Members of Congress that spending growth is beyond their collective abilities to control, the past four years should abundantly make the case.
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The role of dynamic revenue estimation in the budget process. Exceptionally rapid growth in government spending, such as we've seen in the last four years, bears down heavily on the general economy and, thus, on federal revenue growth. The consumption of goods and services by government generally comes at the expense of consumption and investment by private companies. This redirection of economic resources should be a concern to policy makers because private companies generally use identical resources more productively than government. When government uses economic resources instead of private firms, the growth of the economy slows below its potential, which reduces potential employment and tax revenue growth.
Members of Congress and the general public do, however, change public policy from time to time in order to achieve a specific end, like winning a war or encouraging an expansion of economic activity that call for spending above revenues. When the public and the Congress begin considering these policy changes, a better, more informed debate will be had if those involved in the decision process are able to see estimates of how their proposed changes would affect budget outcomes.
For reasons well beyond this hearing, Congress has resisted the adoption of dynamic tax and budget analysis in the past. However, the 107th Congress made great progress in bringing macroeconomic analysis into the tax policy debate, and a beginning also was made in introducing this analytical discipline into the preparation of the annual budget.
I raise this emerging capability here because it relates to directly to the constitutional and fiscal importance of evaluating competing budget priorities. If the budget committees and those other bodies that propose tax policy changes were to use macroeconomic analysis as a routine part of their deliberations, I am confident the Congress would make better decisions between competing budget priorities than they do now.
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Let me briefly illustrate how dynamic economic analysis could inform the annual debate over the federal budget. The Center for Data Analysis at The Heritage Foundation recently completed an econometric analysis of President Bush's proposed economic growth plan. This plan contains a number of major changes to current tax law, including the end to the double taxation of dividends. We introduced these tax law changes into a model of the U.S. economy that is widely used by Fortune 500 companies and government agencies to study such changes. Here are few of the interesting effects we found that would like stem from adopting the President's plan:
Employment would grow by nearly a million jobs per years over the next ten years, which adds significantly to the tax base of federal and state governments.
The drop in the unemployment rate reduces government outlays for unemployed workers at all levels of government.
Investment grows much more strongly under a tax regime without the double taxation of dividends than with such a policy, which expands the growth rate of the general economy, thus offsetting some of the deleterious effects of rapidly growing federal spending.
The payroll tax revenues grow more rapidly with President Bush's plan than without, thus adding about $60 billion more to the trust funds than currently forecasted.
Most importantly, the forecasts of fiscal doom made by many of the plan's critics fail to materialize. The additional economic growth produced by the plan reduces the ten-year ''cost'' to about 45 percent of its static amount.
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This economic feedback also reduces the growth of new publicly held debt that the plan's critics expect. Instead of a trillion dollars in new debt, the economic growth components of the plan produce significantly under 50 percent of that amount. In fact, the plan supports the creation of $3 in after-tax disposable income for every $1 of new debt, while still reducing all publicly held debt by 28 percent between 2004 and 2012.
While this testimony has touched on only a few of the many arguments that can be advanced in support of a balanced budget amendment, I trust that the thrust of my interest in this constitutional outcome is clear. We need the amendment not only to contain the growth in spending (a worthy goal all by itself), but also to protect our constitutional process of vigorous public debate over important policy alternatives. A budget process constrained by a balanced budget amendment and accompanied by the routine use of standard macroeconomic analysis would be more likely to produce the size and quality of government that most Americans desire.
Page 64 PREV PAGE TOP OF DOCBeach6.eps
Mr. CHABOT. Thank you very much. We thank all the witnesses. Now the panel members will have 5 minutes to ask questions, and I'll begin with myself.
Did you want to make your statement at this time?
Mr. ISTOOK. Mr. Chairman, if I might, I appreciate that.
Page 65 PREV PAGE TOP OF DOC Mr. CHABOT. Go ahead, yes.
Mr. ISTOOK. Thank you, Mr. Chairman. I might add there are a couple of comments outside my prepared testimony that I wish to make.
I appreciate, Mr. Chairman, you holding this hearing today. Representative Stenholm and I have reintroduced the balanced budget amendment for the U.S. Constitution, along with what currently is 103 Members of the House. Although, recently we enjoyed 4 years of balanced Federal budgets; the results of 9/11, the fight against terrorism, and economic challenges have all pushed us back into a sea of red ink. Unfortunately, we find that in times of surplus, opponents of the balanced budget say, well, we don't need an amendment. And in times of deficit, those opponents say, well, we cannot afford an amendment. It seems that to some people there is no appropriate time. I believe the American people believe differently.
Although, borrowing can be justified to protect the country in a time of national emergency; deficits should not be acceptable in normal times. Unless we first set a goal of balancing the budget again, it never will happen. And recent experience, once again, proves we need the discipline that a balanced budget amendment provides.
I'm especially happy with the support of the Chairman of the full Committee and your support, Mr. Chairman, as the Chairman of the Subcommittee. And, of course, it would not be possible today to consider this without the hard work done by the long-time leading Democrat on the issue, Congressman Charlie Stenholm of Texas. And I want to acknowledge the fine work done by the National Taxpayers Union as well as that of Senator Larry Craig, who's been working on the issue for the last quarter century.
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It is time to set the standard and show America what our goals are. It doesn't matter what side of the aisle you're on. Some people complain about the deficit, and they say that's why they oppose tax relief. Other people complain about the deficit and say that's why they oppose spending. But everyone who complains about the deficit should support the goal of balancing the budget again. It is hypocritical to say you oppose the deficit but you don't support the balanced budget amendment.
With the expenses of the war on terrorism, we will not balance the budget in the next year or two. And it will take a couple of years for the amendment to be ratified by the States. But the goal needs to be set now to balance the budget again. Without a commitment to the goal, it never will be achieved. Our children and our grandchildren will pay a heavy price, if we don't return to a balanced budget. Not only would they face the high taxes of big Government, but they would bear the extra expense of paying off the bills that we run up today.
This balanced budget amendment proposal, H.J.R. 22, is identical to the language passed by a vote of 300 to 132, in the House in 1995, as part of what was called the original Contract with America. In the U.S. Senate in 1997, it failed by one single vote. Since then, neither the House nor the Senate have voted on it. Obviously, there are many new faces in Congress, and we now have 212 House Members who have never been held accountable because they've never had to vote on a balanced budget amendment. We believe the time has come for every Member of Congress to be held accountable by being required to address this issue head on.
The amendment does include an exemption for times when Congress declares a national emergency, but during peacetime, it would require a supermajority of Congress for the Federal Government to operate at a deficit. With that supermajority, it could do so. No ordinary law can restrain Congress because Congress has the power to remove that safeguard whenever it wishes by a simple majority vote. The only real protection against permanent deficit spending is constitutional protection.
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In light of the current national emergency, more than ever we need this amendment to ensure that deficit spending will end. I'm concerned that sometimes we hear what I think are very misleading statistics being tossed around. For example, some people will say, well, the Federal deficit is only 3 percent of the gross domestic product, or the projected deficit is only about 3 percent. Mr. Chairman, that's saying that it's 3 percent of other people's money. The U.S. Government does not own the American economy, nor anything that belongs to the American people. That's akin to a business saying that, well, our debt is only 3 percent of our customers' money.
Let's talk about what percentage this is of the United States Government and its money, its cash flow. If you look at it in those terms, you'll find that the deficits we're looking at are approximately 40 percent or more of discretionary spending, 15 percent of overall spending. Let's not diminish or downplay the problem or try to understate it by claiming it's only 3 percent or so of GDP. Let's look at how large it is in terms of the overall Federal budget. It is very significant when we look at it in that perspective.
Mr. Chairman, we are not embarking upon an easy process. But as was stated by a former President, some things we choose to do not because they are easy but because they are hard. Sometimes, if it's worth doing, it's a challenge, but it is worth doing.
Thank you, Mr. Chairman.
Mr. CHABOT. Thank you, and I recognize myself for 5 minutes. I'll begin with Mr. Beach.
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Mr. Beach, you started out your testimony by saying something that I agree with, and that's that we should balance the budget whether or not we have a constitutional amendment requiring us to do so. Unfortunately, we have been unable or unwilling to do that except for about 3 years in the last 35 years or so, you know, because we just don't show the restraint around this place that we ought to. That's in my view the principal reason; although, there are other factors as wellSeptember 11th, the weakening economy, et cetera.
You also stated that there's a difference, of course, between the States right now which are in the budget crunch time and the Federal Government. It's the same basic issue, but with the States, they have in their constitutionsmostthat they have to balance the budget. So, they actually have to make the tough decisions. And sometimes it's not pretty, but they have to make those decisions.
Unfortunately, we kind of get to punt. We get to pay for everything or spend everything, and we're either printing money or borrowing, whateverhowever you want to look at it. And as a result of that, weover the years we've built up this huge debt, and my recollection is it's about 16 cents on every dollar that we take from the American taxpayer goes just to pay their share of the interest on that debt.
Could you discuss briefly what impact that has on the economy, what impact it has on employment, and what does it really do to people, taking that particular amount of money out of their pockets and paying off the debt? What do they get for it, in other words?
Mr. BEACH. Well, let's start with the silver lining, I think, and that is that everything that the debt has paid for, the public desires. In that case, they are getting the Government that they desire.
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Now, one of my points early on is this: that because the Congress and the Administration are able to borrow a lot of money, we don't really know whether that's what the public wants when laws are enacted and so forth. So, it's a little unclear whether or not the debt which we have has, in fact, purchased the Government that the public wants. And I believe that is an open question.
Does the debt affect the U.S. economy? Well, most certainly it does, but in kind of strange ways. When the debt is at the level that it's at right now, which is roughly 34 or 35 percent of gross domestic product, which is one way of thinking about it, it probably isn't large enough that it is actually a barrier to entrepreneurship and economic growth. It may very well be a weight on entrepreneurship and economicbut not a barrier, like in some countries where it's several hundred times more than the GDP or twice the GDP or three times the GDP.
But here's what I think happens when you do see debt accumulated by Government, certainly at the Federal level. Current generations begin to think, well, that's probably going to require one of two things in the future: a tax increase or a spending cut. Or it's going to require some kind of changes in public policy that produce a stronger economy, so increasing revenues occur. And they begin to discount certain kinds of risks. The stock market looks at a new business and, well, I can only invest in that business, but sometime in the future tax rates are going to have to go up. Or the subsidies or the infrastructure the Government provides with this kind of business are going to have to be pulled back. And so that business doesn't get created, and the jobs that come from that business don't get created, and that slows the economy.
Page 70 PREV PAGE TOP OF DOC So I'm not at the point where I'm going to say push the red button on our debt. It's growing, it's a problem, it should be addressed. But to say that it is completely inconsequential is certainly wrong, both from a theory standpoint and from the statistics as well.
Mr. CHABOT. Thank you very much.
Dr. Berthoud, let me turn to you, if I can. As you know, I'm a firm believer in tax cuts, and I know that your organization is as well. Could you discuss brieflyand I've only got about a minute here, so I'll have to make it relatively briefthe impact on passing a balanced budget amendment requiring us to balance the budget and the effect that it would have on our ability to implement tax cuts, either in the near term or the long term, the impact that those tax cuts would have on the economy and balancing it and that whole general thing.
Mr. BERTHOUD. I think obviously it would make it harder to either enact further tax relief or, on the flip side of the coin, to increase spending. It would require Congress and the President to make choices.
Now, I know certainly in this Subcommittee there are deep differences, as were stated in the opening statements, on what is the appropriate level of taxation. Some members, apparently, base it on 38 percent of income taxes. Some members may want to see that at 40 percent, 45, 50 percent. It's the view of the National Taxpayers Union and I think of you that 38 percent is more than enough and, in fact, it should be a lot lower.
That's a debate we would have in the context of the balanced budget amendment, but it would be a different debate as the debates on spending would be, because anything we did we would have to pay for. We would have discussions.
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Bill Beach has a discussion in his testimony on dynamic scoring. We can talk about that issue. I think sometimes tax cuts, they don't pay for themselves entirely, but there is some revenue recapture that I think is not being reflected in current models of the Joint Tax Committee.
Mr. CHABOT. Okay. Thank you very much. I appreciate that.
And we'll now turn to the gentleman from New York, Mr. Nadler, for 5 minutes.
Mr. NADLER. Thank you
Dr. Berthoud, I think I'll ask you the question first. I think it was you and Mr. Beach who said that States have to balance their budgets. States have capital budgets. States have to balance their expense budgets or their operating budgets, not their capital budgets. They borrow from their capital budget. So does any business or so does a family in the sense of a car loan or a home mortgage. And, for that matter, Statesand Governor Rockefeller and former Attorney General Mitchell led the way in inventing moral obligation bonds so the State of New York probably has, I don't know, 10 or 20 times as much moral obligation bonds as it does regular bonds outstanding. So that's the difference in the Federal Government in that respect, except that we don't have a capital budget. And when you say you have to balance the budget, you're saying we shouldn't borrow. Unlike families, corporations, States, local governments, we should borrow under no circumstances.
Page 72 PREV PAGE TOP OF DOC Does that make economic sense?
Mr. BERTHOUD. You raise an excellent point, and I think in the best of all worlds, I think we could have an exception for a capital budget of the Federal Government. Of course, you know, I haven't done the count, but of the 535 Members of the United States House and Senate, I am sure a strong majority have issued repeated statements about the virtues of balancing the budget, but year in and year out we don't get it done. Here we're saying, if I could, we're saying, you know, we have to do a balanced budget amendment because Congress cannot do it otherwise. I think what I'm saying is in an ideal world, I think we should have a capital budget. I think the reality is
Mr. NADLER. And the expense budget should be balanced, and the capital budget should be financing that borrowing.
Mr. BERTHOUD. I think, unfortunately, the reality is that a capital budget in the context of BBA would create too big a loophole, and I think honestly it would be more harm than good because I think it would beand I have seen this in States, that all too often capital budgets are abused, and there'sit creates fiscal
Mr. NADLER. Let me ask Mr. Kogan to comment on that quickly.
Mr. KOGAN. It's a difficult question to answer. Because I oppose the amendment, I wouldn't support this amendment with a capital budget
Mr. NADLER. I don't support it either, but don't you think
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Mr. KOGAN. But, no
Mr. NADLER.even considering
Mr. KOGAN. In considering how we budget, I think it is better not to treat capital separately from other expenses. I thinkand there are a couple of reasons for that.
The first is that capital is not the only type of investment we make. We make investments in education. We make investments in job training. We make investments in scientific research, civilian and military.
Mr. NADLER. Some people would call
Mr. KOGAN. Some people would. And the debate over what is a true capital expenditure would become a matter of theology rather than accounting. Leaving it to the accountants is only useful in a tax environment. It is notit does not necessarily make good public policy.
Beyond that, certain things that are not capital expenditures as suchthe expenditures for a standing army, for examplenonetheless, have benefits for the future, not just for the present.
Mr. NADLER. Let me ask you, Mr. Kogan, one quick question, with a quick answer, and then I have another question for the other witnesses, and then I'll finish. We keep hearing the virtues of a balanced budget. Now, we have a national debt, and obviously if the deficitif you have a deficit, the national debt goes up; if you have a surplus, the national debt goes down. We also have economic growth.
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From an economic point of view, do you really need a balanced budget over time, or is it sufficient to have a budget thata Federal budget arrangement over time such that in combination with your economic growth rate your national debt as a percentage of GDP is going down, not up; even though you may havein other words, if you have a small deficit this year but the growth rate is big enough, your national debt as a percentage of GDP is going down. From an economic point of view, isn't that all you really need?
Mr. KOGAN. Two points. First of all, you are right. During the period from 1946 to 1980, we ran deficits almost every year. I think we had surpluses in only 3 or 4 years. Nonetheless, the debt-to-GDP ratio dropped from 111 percent of GDP to 25.5 percent of GDP because the deficits were small, they were smaller than the rate of growth of the economy. This is like saying that what I could afford to put on my credit card the year I graduated from college, which was about $10, iscan grow as I become wealthier, and nonetheless, my economic circumstances are a lot better now than when
Mr. NADLER. So that is sufficient from an economic point of view.
Mr. KOGAN. Yes. But the point that Dr. Smetters made, which is that we see in front of us large deficits looming, argues that we should be running down the debt now.
Mr. NADLER. Yes, I understand. And my last question is for Dr. Berthoud. The Treasury Secretary, the President, the Majority Leader of the House, and Sue Myrick, among others, are telling us that the massive deficits we are running are not cause for worry and that they, in fact, would prefer a small Government with large deficits to a large Government with smallwith balanced budgets.
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Are they wrong or are the proponents of this amendment wrong? Which is the case?
Mr. BERTHOUD. I think the context ofI think Dr. Kogan was right. First, debt as a share of GDP, and as you rightly mentioned, that is one of the most critical variables that we have to look at, and I think
Mr. NADLER. They're telling us it's not anymore.
Mr. BERTHOUD. Well, I think what they're sayingwell, I don't want to speak for them, but what I would say is that the deficits we have right now as a share of GDPcertainly, I think we all know thiswere a lot higher in the 1980's. And I think as Bill Beach said, the levels of deficit and debt as a share of the economy that we're at right now are not particularly troubling. I think the goal should be reducing the debt as a share of GDP, but the important thingand this goes to Dr. Smetters' testimonythe big elephant in the room is this long-term liability we face with Social Security and Medicare. And in that context, I think we have to think about it differently. And
Mr. NADLER. That's very different from what this amendment says, which is that you should never have any debt in a given year.
Mr. BERTHOUD. Well, I think what this amendment is trying to do is saying that year in and year out there should be fiscal responsibility. And I think in the context
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Mr. NADLER. That's not what the amendment says. The amendment says no debt, it must be balanced every single year except during time of national emergency.
Mr. CHABOT. The gentleman's time has expired, but if you'd like to respond to the question.
Mr. BERTHOUD. I was going to say it says no deficit, and
Mr. NADLER. Except in time of national emergency.
Mr. BERTHOUD. That's right.
Mr. CHABOT. Okay. The gentleman from Virginia, Mr. Scott, is recognized for 5 minutes.
Mr. SCOTT. The gentleman from New York has pointed out that in a capital budget, the theology aspect of it is to give you an incentive, instead of building a prison, just lease the prison, and, in fact, you can help balance your budget by selling the prison that you already own and then leasing it back. And you have the accounting games.
We are in a situation now where I think people have an excuse for running up the deficits. On September 10th, we hadwe werehad spent all the surpluses we had run up, on-budget surplus, and we spent up just about all of the Medicare and were heading into Social Security. That's on September 10th.
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Now that September 11th happened, now we have an excuse and there has been no limit on what kind of deficits we're running up. And when I made my remarks, I asked people to talk about how this amendment would get us into balance. Everybody talked about how nice a balanced budget is, but not how this amendment, other than the title, would help us get there.
This title doesn't require a balanced budget. It just tells you how to pass an unbalanced budget. Now, it doesn't have any tough choices in it. You've still got to make the tough choices. The gentleman, Dr. Berthoud, said that if the balanced budget magic wand is passed, the farm bill would not have passed, the tax cuts would have.
Mr. BERTHOUD. No, I didn't say that. I said neither might not have passed.
Mr. SCOTT. Well, if, as is likely the case now and knowing how we operate, there is no suggestion on the books that we balance the budget in 1 year. If you propose a draconian deficit reduction package, draconian to try to get the thing in balance, you'd need 60 votes rather than a simple majority. My question to you: Are you more likely to pass a draconian deficit reduction package with a 60-votea two-thirds requirement, or are you more likely to pass it with a simple majority?
Mr. BERTHOUD. If I could, I think you're absolutely right, Congressman, that this is not aboutthis amendment does not say we will cut farm subsidies or mass transit subsidies
Page 78 PREV PAGE TOP OF DOC Mr. SCOTT. Well, if youI don't have much time.
Mr. BERTHOUD. Sorry.
Mr. SCOTT. It's a simple question. Are you more likely to pass a draconian deficit reduction package with a twowith a three-fifths majority requirement or a simple majority?
Mr. SMETTERS. No, it's the override you need a three-fifths. I mean, you're required
Mr. SCOTT. You are not required. You haveif you're going to pass a deficit reduction package, a draconian deficit reduction packagenobody up here is thinking about balancing the budget in 1 year. My question is: Is the twois the three-fifths requirement to pass a budget more likely to produce a draconian deficit reduction package or a Katy-bar-the-door, everybody, Christmas-tree time, you need my vote, you've got to add another, for me, aircraft carrier. The gentleman from Texas is going to get himself the supercollider opened back up.
This afternoon, we had on the agenda something that was going to pass, a little tax relief for soldiers. And you're looking to find friends and you've got the tacklebox people with their little goody, and you've got the gamblers fromoverseas gamblers got their little goodies. There are no tough choices. If you need the votes and it's going to pass, are you more likely to pass a draconian deficit reduction package or are you more likelyby upping it to 60 percent, more likely to pass a Katy-bar-the-door, everybody get their goodies in it? Does anybody know? If we could just pass the title without having to go in detail
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Mr. NADLER. Would the gentleman yield for a moment?
Mr. SCOTT. I'll yield.
Mr. NADLER. I think the fact that the leadership of the House just took the armed forces tax relief bill off the floor a few minutes ago indicates that by adding 100 percent additions and drives the Members to vote for the bill, it wasn't sufficient. So that may answer your question.
Mr. SCOTT. Well, the
Mr. BEACH. Congressman Scott
Mr. SCOTT. I assume that the military exception that we're in right now would make the whole debate moot, anyway, and get us back to try to make the tough decisions.
A final question, a point I'd like to make, and then I'll just yield to whoever wants to say whatever they want, is that the Social Security situation makes this whole thing ridiculous. In 19in 2037, we are going to be running up a deficit on Social Security in the overall rangein the trillion-dollar-a-year range. This amendmentmaybe about $800 billion. This amendment would prevent usif we had built up the surplus like we're supposed to in the lockbox, we couldn't spend out of the lockbox. How are we going towhat happens in 2037 if thisif the title passed and it actually meant something?
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Mr. BEACH. It is very important for this Congress and the Congresses that follow it to make the changes in Medicare and Social Security that will prevent us from having to come up with $43 trillion. But many of us on the outside, and many Members of Congress, too, have very little confidence
Mr. SCOTT. If you built up the lockbox, you couldn't spend the lockbox.
Mr. BEACH. Congressman, there isn't any lockbox, as you know, and there never has been. So it's fictions like that which prevent this from happening.
Now, what I was saying in my testimony is that my experience at the State level indicates one thing: that if legislators, Members of Congress in this case, are going to come to resolutions of problems, with all of the great difficulties they have when they have to put together a majority or two-thirds in order to pass anything, sometimes it's very helpful to have something outside of their deliberations pressing them to a decision. The public used to do that in the 19th century and the early 20th century. The public kept it there. But it's not there like it used to be.
At the State level, on expense budgeting, and sometimes on capital budgeting, it's the Governor saying if you don't do this, I'm going to veto this legislation, or I'm going to force you to a resolution.
But because of the constitutional framework that we have and the articles which govern the processes and rules of the House, without something else there, it's hard for the Members to come to that resolution.
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Mr. SCOTT. How does that something else help? My judgment is the 60-vote requirement would hurt, because the 41 Senators that stand over on the side and say if you don't add an aircraft carrier or supercollider or more agriculture bills and everything else, we're not voting for it, which would require everybody else to balance the budget overnight. They're not going to do it.
Mr. BEACH. Maybe youmaybe a line-item veto would be the route to take. Put the power in the hands of the President. But that'sthat's not what you
Mr. SCOTT. Would this make matters better or worse?
Mr. BEACH. I think it may help you resolve some of the problems that
Mr. SCOTT. How?
Mr. BEACH.you seem unable to resolve.
Mr. CHABOT. The gentleman's time's expired, but the gentleman has asked how, so if you'd like to take a shot at how, go right ahead.
Mr. BEACH. I'm not going to take a shot at how. That's well beyond my testimony. [Laughter.]
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Mr. CHABOT. Okay. All right. Well, this is obviously a very complex area, and I feel very confident that it will pass the House. I can't speak for the Senate. But we appreciate the panel's testimony here this afternoon, and I would just reiterate that I would ask unanimous consent that all Members have 5 days to revise and extend their remarks and include extraneous material.
If there's no further business to come before the Committee, we are adjourned.
[Whereupon, at 1:14 p.m., the Subcommittee was adjourned.]
(Footnote 1 return)
Herbert Stein, Presidential Economics: The Making of Economic Policy from Roosevelt to Clinton (Washington, DC: The American Enterprise Institute, 1994), Pages 350351.
(Footnote 2 return)
Peter G. Peterson, Facing Up: How to Rescue the Economy from Crushing Debt and Restore the American Dream (New York, NY: Simon & Schuster, 1993), Page 223.
(Footnote 3 return)
''Istook Introduces Balanced Budget Amendment,'' Press Release of Representative Ernest Istook, February 13, 2003, http://www.house.gov/istook/rel-bba03.htm.
(Footnote 4 return)
Charles Bowsher, ''The Disinvestment of Government,'' The GAO Journal, Number 4, Winter 1988/89, Page 60.
(Footnote 5 return)
James Savage, Balanced Budgets & American Politics, (Ithaca, NY: Cornell University Press, 1988), Page 9.
(Footnote 6 return)
Table 8.4, Fiscal Year 2004 Historical Tables, Budget of the United States Government. During that same period, national defense dropped from 9.2 percent of GDP to 3.4 percent.
(Footnote 7 return)
Charles Wolf, Jr., Markets or Government: Choosing Between Imperfect Alternatives (Cambridge, MA: MIT Press, 1988), Page 146. Lewis Uhler extrapolates from these findings: ''Assume that the United States were to reduce the proportion of its spending at all levels of government from 40 percent of our Gross Domestic Product (GDP) to about 20 percent. Assuming a current average annual economic growth of about two percent, we would double the average annual rate of growth of our nation's economyand compound that every year.'' (Lewis Uhler, Setting Limits: Constitutional Control of Government, (Washington, DC: Regnery Gateway, 1989), Pages 8384.)
(Footnote 8 return)
Alice Rivlin, ''Reform of the Budget Process,'' American Economics Association Papers and Proceedings, May 1984.
(Footnote 9 return)
See John Berthoud, Gramm-Rudman-Hollings: The Fiscal Weapon of Public Choice? (New Haven, CT: Yale University Doctoral Dissertation, Department of Political Science, 1992); Sung-Deuk Hahm, Mark S. Kamlet, David C. Mowery, and Tsai-Tsu Su, ''The Influence of the Gramm-Rudman-Hollings Act on Federal Budgetary and Fiscal Policy Outcomes 19861989,'' Paper presented to the Annual Meeting of the Southwestern Political Science Association, March 2729, 1991.
(Footnote 10 return)
Statement of Congressman Steve Chabot, Chairman, House Judiciary Subcommittee on the Constitution, Introduction of the Balanced Budget Constitutional Amendment, February 13, 2003.
(Footnote 11 return)
The Associated Press, ''Balanced Budget Amendment Introduced,'' February 13, 2003, http://abcnews.go.com/wire/Politics/ap200302131522.html.
(Footnote 12 return)
See, for example, James M. Poterba, ''State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics.'' Journal of Political Economy, Vol. 102, No. 4. (Aug., 1994), pp. 799821. Also see Henning Bohn and Robert P. Inman, ''Balanced-Budget Rules and Public Deficits: Evidence from the U.S. States.'' Carnegie-Rochester Conference Series on Public Policy, 45 (1996), pp. 1376.