[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 
([email protected]) 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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