    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

                           BALANCED BUDGET AMENDMENT
    =======================================================================

                                    HEARING

                                   BEFORE THE

                        SUBCOMMITTEE ON THE CONSTITUTION

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                       ON

                                  H.J. Res. 22

                                   __________

                                 MARCH 6, 2003

                                   __________

                                  Serial No. 1

                                   __________

             Printed for the use of the Committee on the Judiciary

        Available via the World Wide Web: http://www.house.gov/judiciary

                                    _______

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                           COMMITTEE ON THE JUDICIARY

                F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
    HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
    HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
    LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
    ELTON GALLEGLY, California           JERROLD NADLER, New York
    BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
    STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
    WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
    CHRIS CANNON, Utah                   SHEILA JACKSON LEE, Texas
    SPENCER BACHUS, Alabama              MAXINE WATERS, California
    JOHN N. HOSTETTLER, Indiana          MARTIN T. MEEHAN, Massachusetts
    MARK GREEN, Wisconsin                WILLIAM D. DELAHUNT, Massachusetts
    RIC KELLER, Florida                  ROBERT WEXLER, Florida
    MELISSA A. HART, Pennsylvania        TAMMY BALDWIN, Wisconsin
    JEFF FLAKE, Arizona                  ANTHONY D. WEINER, New York
    MIKE PENCE, Indiana                  ADAM B. SCHIFF, California
    J. RANDY FORBES, Virginia            LINDA T. SANCHEZ, California
    STEVE KING, Iowa
    JOHN R. CARTER, Texas
    TOM FEENEY, Florida
    MARSHA BLACKBURN, Tennessee

                 Philip G. Kiko, Chief of Staff-General Counsel
                   Perry H. Apelbaum, Minority Chief Counsel
                                     ------

                        Subcommittee on the Constitution

                          STEVE CHABOT, Ohio, Chairman

    STEVE KING, Iowa                     JERROLD NADLER, New York
    WILLIAM L. JENKINS, Tennessee        JOHN CONYERS, Jr., Michigan
    SPENCER BACHUS, Alabama              ROBERT C. SCOTT, Virginia
    JOHN N. HOSTETTLER, Indiana          MELVIN L. WATT, North Carolina
    MELISSA A. HART, Pennsylvania        ADAM B. SCHIFF, California
    TOM FEENEY, Florida
    J. RANDY FORBES, Virginia

                       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

                               OPENING STATEMENT

                                                                       Page
    The Honorable Steve Chabot, a Representative in Congress From the
      State of Ohio, and Chairman, Subcommittee on the Constitution..     1
    The Honorable Robert C. Scott, a Representative in Congress From
      the State of Virginia..........................................     3
    The Honorable Jerrold Nadler, a Representative in Congress From
      the State of New York, and Ranking Member, Subcommittee on the
      Constitution...................................................     3
    The Honorable Ernest J. Istook, Jr., a Representative in Congress
      From the State of Oklahoma.....................................    73

                                   WITNESSES

    John Berthoud, Ph.D., President, National Taxpayers Union,
      National Taxpayers Union Foundation
      Oral Testimony.................................................     6
      Prepared Statement.............................................     8
    Kent Smetters, Ph.D., Assistant Professor, The Wharton School
      Oral Testimony.................................................    11
      Prepared Statement.............................................    13
    Mr. Richard Kogan, Senior Fellow, Center on Budget and Policy
      Priorities
      Oral Testimony.................................................    21
      Prepared Statement.............................................    23
    Mr. William M. Beach, Director, Center for Data Analysis, John M.
      Olin Senior Fellow in Economics, The Heritage Foundation
      Oral Testimony.................................................    55
      Prepared Statement.............................................    56

              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.....................     2

                           BALANCED BUDGET AMENDMENT

                                  ----------

                            THURSDAY, MARCH 6, 2003

                      House of Representatives,
                      Subcommittee on the Constitution,
                                    Committee on the Judiciary,
                                                        Washington, DC.
        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.
        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 continued--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 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.
        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.
        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 FY-2004 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.
        Public opinion surveys consistently show that 70-80% 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 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.

        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-balance--the on-budget part of the--the 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.
        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 considering--I mean we know what's going to happen--
    this 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
    fairly--it assumes there will never be a recession, that the
    boom will go on forever--booms never go on forever--and 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.
        We've now gone to where we're going to have--we'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 that--have 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.
    Someone--I forget which Member of the House was quoted in the
    New York Times a few weeks ago saying, that well, if you had to
    choose--he 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 can--or 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.
        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.
        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 2000-2001 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.
        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.
        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 be--unless 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, has--I 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.
        How--in 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 deficits--whether
    high interest rates, inflation or economic stagnation--comes
    not from the deficits but from the high level of Government
    spending.''
        And I certainly would think--again, I think the example I
    would point to--it's hard to imagine in your balanced budget
    amendment--if we had a balanced budget amendment in place last
    year, things like the farm subsidy bill would have been
    enacted, but--and 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. Friedman--the 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 do--I think Congressman Nadler said expenditures----
        Mr. Nadler. Nadler.
        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 wish--and I know Republicans and
    Democrats unanimously would like to claim credit for that--much
    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 of--and NTU's belief--that
    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 wish--Alice 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 we--I 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:]
                      Prepared Statement of John Berthoud
                                i. introduction
        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 NTU--and our educational affiliate,
    the National Taxpayers Union Foundation--on 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 interests--both
    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.
        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 be--unless the
            larger government deficit is matched by an equally larger total
            of private savings.\1\
    ---------------------------------------------------------------------------
        \1\ Herbert Stein, Presidential Economics: The Making of Economic
    Policy from Roosevelt to Clinton (Washington, DC: The American
    Enterprise Institute, 1994), Pages 350-351.

        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 imbalance--the 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.
        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.'' \2\
    ---------------------------------------------------------------------------
        \2\ 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.
    ---------------------------------------------------------------------------
        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.'' \3\
    ---------------------------------------------------------------------------
        \3\ ``Istook Introduces Balanced Budget Amendment,'' Press Release
    of Representative Ernest Istook, February 13, 2003, http://
    www.house.gov/istook/rel-bba03.htm.
    ---------------------------------------------------------------------------
        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.'' \4\ Bowsher cited AIDS
    as one example of a problem not dealt with promptly because of our
    large deficits.
    ---------------------------------------------------------------------------
        \4\ Charles Bowsher, ``The Disinvestment of Government,'' The GAO
    Journal, Number 4, Winter 1988/89, Page 60.
    ---------------------------------------------------------------------------
        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 deficits--whether high interest
            rates, inflation or economic stagnation--comes not from the
            deficits but from the high level of government spending that
            those deficits help to finance.\5\
    ---------------------------------------------------------------------------
        \5\ James Savage, Balanced Budgets & American Politics, (Ithaca,
    NY: Cornell University Press, 1988), Page 9.

        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.
        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.\6\
    ---------------------------------------------------------------------------
        \6\ 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.
    ---------------------------------------------------------------------------
        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.\7\
    ---------------------------------------------------------------------------
        \7\ 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 economy--and compound that every year.'' (Lewis Uhler, Setting
    Limits: Constitutional Control of Government, (Washington, DC: Regnery
    Gateway, 1989), Pages 83-84.)
    ---------------------------------------------------------------------------
        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.\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.
    ---------------------------------------------------------------------------
        \8\ Alice Rivlin, ``Reform of the Budget Process,'' American
    Economics Association Papers and Proceedings, May 1984.
    ---------------------------------------------------------------------------
        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 1985-1990. This effort may have modestly reduced
    deficits--on the order of $15 billion per year, mainly through limiting
    spending.\9\ But the same factor that undermined the law's
    effectiveness ultimately killed it--Gramm-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.
    ---------------------------------------------------------------------------
        \9\ 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 1986-
    1989,'' Paper presented to the Annual Meeting of the Southwestern
    Political Science Association, March 27-29, 1991.
    ---------------------------------------------------------------------------
        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 effective--and
    perhaps only--way to ensure that Congress balances its budget each
    year.'' \10\
    ---------------------------------------------------------------------------
        \10\ Statement of Congressman Steve Chabot, Chairman, House
    Judiciary Subcommittee on the Constitution, Introduction of the
    Balanced Budget Constitutional Amendment, February 13, 2003.
    ---------------------------------------------------------------------------
        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.'' \11\
    ---------------------------------------------------------------------------
        \11\ The Associated Press, ``Balanced Budget Amendment
    Introduced,'' February 13, 2003, http://abcnews.go.com/wire/Politics/
    ap20030213--1522.html.
    ---------------------------------------------------------------------------
                                 iv. conclusion
        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 it--as 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.
        Thank you.

        Mr. Chabot. Thank you.
        Mr. Berthoud. Thank you
        Mr. Chabot. Dr. Smetters?

     STATEMENT OF KENT SMETTERS, ASSISTANT PROFESSOR, THE WHARTON
                                 SCHOOL

        Mr. Smetters. Thank you, Chairman and the Members of the
    Committee for the opportunity to speak on this amendment. I
    support--I 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 the--simply 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.
        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 still--in 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.
        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
        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
                  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.
        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.
        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.
        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.
               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. LIt decomposes the fiscal imbalance into that On Account of
            Living and Past Generations as well as that On Account of
            Future Generations.

            2. LIt covers all government outlays and revenue sources.

            3. LIt 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.
        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 case--in 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) LTHE 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.
        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) LTHE 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.
    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) LREPORTING 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.

    (ii) LREPORTING 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 programs--and a fairly regressive
    tax at that--was 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.''
        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 economists--both politically conservative and liberal--
    that 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.
        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. LThe 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. LFor 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.

            3. LBy 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. LAfter 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.
                                   in closing
        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.\1\ 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.
    ---------------------------------------------------------------------------
        \1\ 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. 799-821. 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. 13-76.
    ---------------------------------------------------------------------------
        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.
        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
    (smetters@wharton.upenn.edu) or by phone (215-898-9811).

        Mr. Chabot. Thank you, Dr. Smetters.
        Mr. Kogan?

              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.
        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.
        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
    does--this requires a balanced budget each year--is 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.
        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 possible--and I think this Committee
    particularly is well suited to look at the issue--that 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.
        Sixth, there are wide varieties Congress could use to evade
    the balanced budget amendment if it wanted to--we 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 known--if 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.
        [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 house--that's what a mortgage is--and 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.
        Second, such a restrictive amendment is truly inferior economics--
    it 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 recession--
    raising taxes and cutting education, health care, social services, and
    infrastructure--are 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 legislation--
    the so-called PAYGO rule--the 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 legislation--rather than the overall level
    of the surplus or deficit--is 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.
        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 imagined--court-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.
        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.
        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 question--war 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
    Union--to 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.

                                   ATTACHMENT

        Mr. Chabot. Thank you very much.
        Mr. Beach?

       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
    attachment--and I hope it does--of 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.
        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 Constitution--the way in which our republican form of
    Government operates--this 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 level--and many of you have State
    experience, as I do, where we are required to keep the balance
    in budget--the budget in balance--you 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?
        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 spending--that'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?
        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 funds--all 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.
        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.
        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.

             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.
        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.
        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.

             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.

        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.
        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.
        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.
        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.
        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 well--
    September 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 constitutions--most--that
    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, whatever--however you want to look at it. And as
    a result of that, we--over 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.
        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 economic--but 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.
        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 briefly--and I've
    only got about a minute here, so I'll have to make it
    relatively brief--the 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.
        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,
    States--and 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.
        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 be--and I have seen this in States,
    that all too often capital budgets are abused, and there's--it
    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----
        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
    think--and 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 not--it does not necessarily
    make good public policy.
        Beyond that, certain things that are not capital
    expenditures as such--the expenditures for a standing army, for
    example--nonetheless, 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 deficit--if you have a deficit, the national
    debt goes up; if you have a surplus, the national debt goes
    down. We also have economic growth.
        From an economic point of view, do you really need a
    balanced budget over time, or is it sufficient to have a budget
    that--a 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 have--in 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,
    is--can 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
    small--with balanced budgets.
        Are they wrong or are the proponents of this amendment
    wrong? Which is the case?
        Mr. Berthoud. I think the context of--I 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 saying--well, 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 GDP--certainly, I
    think we all know this--were 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 thing--and this goes
    to Dr. Smetters' testimony--the 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----
        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 had--
    we were--had 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.
        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-vote--a 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 about--this amendment does not
    say we will cut farm subsidies or mass transit subsidies----
        Mr. Scott. Well, if you--I 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 two--with 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 have--if you're going
    to pass a deficit reduction package, a draconian deficit
    reduction package--nobody up here is thinking about balancing
    the budget in 1 year. My question is: Is the two--is 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 from--
    overseas 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 likely--by 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----
        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 19--in 2037, we are going to be running up a
    deficit on Social Security in the overall range--in the
    trillion-dollar-a-year range. This amendment--maybe about $800
    billion. This amendment would prevent us--if 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 to--what happens in
    2037 if this--if the title passed and it actually meant
    something?
        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.
        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 you--maybe a line-item veto would be the
    route to take. Put the power in the hands of the President. But
    that's--that'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.]
        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.]

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