[Congressional Record Volume 141, Number 22 (Friday, February 3, 1995)]
[Senate]
[Pages S2119-S2122]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


              ECONOMISTS OPPOSE BALANCED BUDGET AMENDMENT

  Mr. MOYNIHAN. Mr. President, this morning, in a room just off the 
Senate floor, a group representing over 450 of our Nation's most 
distinguished and respected economists--among them seven Nobel 
Laureates--gathered to express their profound and unequivocal 
opposition to a constitutional amendment requiring a balanced Federal 
budget.
  Their conclusions, based not on partisan proclivities, but on decades 
of scholarly inquiry in the field of economics, deserve the full 
attention of the Senate. I ask unanimous consent that a portion of 
their remarks be reprinted in the Congressional Record.
  There being no objection, the remarks were ordered to be printed in 
the Record, as follows:

      Statement of Henry J. Aaron on the Balanced Budget Amendment

       The economic, legal, and political arguments against the 
     balanced budget amendment are powerful, and I hope that these 
     arguments persuade enough Senators to defeat the amendment in 
     the Senate. Nonetheless, it is possible that the proposed 
     amendments will be sent to the states for ratification. My 
     remarks this morning are addressed to state legislators. They 
     can be expressed in one word: Beware!
       Congress has elected not to include in the draft amendment 
     any limit on the capacity of Congress to place mandates on 
     the states. The reason is the supporters of the amendment 
     knew that they could not count on enough votes to pass the 
     amendment if such a prohibition were included. Why are 
     members of Congress unwilling to include such limits in the 
     amendment but instead are limiting themselves to procedural 
     limitations, which they are free to change at any time?
       The reason, clearly, is that members of Congress understand 
     that they may wish to carry out policies for which they are 
     unwilling to vote the taxes that would be required under the 
     balanced budget amendment. They wish to reserve to themselves 
     the power to force states and localities to carry out the 
     Congressional will.
       Let me be clear. I believe that unfunded mandates are often 
     appropriate vehicles for federal action and I oppose 
     including in the constitution prohibitions or major 
     constraints on their use. But such mandates, on occasion, 
     have been used abusively or inappropriately in the past. A 
     balanced budget amendment make it quite likely that they 
     would be used far more extensively in the future.
       The public mood currently oppose activist policies by the 
     federal government. But anyone with more than an ounce of 
     historical perspective should recognize the political styles 
     change. Should the states ratify the balanced budget 
     amendment, Congress will predictably and inexorably turn to 
     mandates on states and localities to carry out the 
     Congressional will at such time in the future as the public 
     mood comes once again to favor activist government, By 
     forcing states to raise taxes to pay for mandated services, 
     Congress will be able to claim credit, while state officials 
     take the heat.
       In plain English, the balanced budget amendment is a time-
     bomb that threatens to undermine state fiscal and 
     governmental autonomy. State legislators, whether 
     conservative or liberal, should act as custodians for their 
     successors whose independence is vital for the health of the 
     U.S. political system.
                                                                    ____

                     Statement of Isabel V. Sawhill

       There are lots of reasons to be against a Balanced Budget 
     Amendment to the Constitution. These have been well-
     articulated by my colleagues today.
       However, in my view, there is only one big reason--and that 
     is that a Balanced Budget Amendment is a dishonest means of 
     achieving a worthy goal.
       Let me be clear. I am all for balancing the budget. It is 
     the single most important means we have to put the economy on 
     a higher growth path and improve standards of living. But 
     amending the Constitution will not get the job done. Only 
     doing the job will get the job done.
       To use a simple analogy, you can't lose weight simply by 
     making a New Year's resolution to go on a diet. You can only 
     lose weight by eating less or exercising more.
       Let's have a debate about how fast and when we can safely 
     take off the pounds. Let's also have a debate about whether 
     we should eat less or exercise more. But let's not pretend 
     that resolutions or changing a document as basic as the 
     Constitution will solve the problem.
       It substitutes process for problem-solving, pious words for 
     specific deeds, public manipulation for restoration of the 
     public trust.
       Thank you.
                                                                    ____

           Statement by Paul A. Samuelson and Robert M. Solow

       We oppose the Balanced Budget Amendment because we believe 
     it to be both bad government and bad economics.
       At the most fundamental level we think that it is a grave 
     mistake to involve the Constitution in the year-to-year 
     making of economic policy. In this case, especially, when the 
     mere definition of what is allowed and forbidden can never be 
     unambiguous, it seems damaging and foolhardy to impose a 
     constitutional mandate whose meaning will have to be 
     adjudicated on a case-by-case basis by the courts. Federal 
     judges who have better things to do will have to decide 
     whether this or that accounting gimmick counts as revenue or 
     outlay in calculating the balance of the budget. The infinite 
     inventiveness of accountants can always stay one step ahead 
     of the judiciary. It is astonishing that conservatives who 
     think of themselves as strict constructionists can 
     contemplate 
     [[Page S2120]] embroiling the Constitution so directly in 
     matters of everyday politics that should clearly be the 
     province of legislation.
       It is inevitable, and it is clearly intended, that the 
     constraint imposed by the Balanced Budget Amendment will be 
     used as an instrument of social policy by denying the Federal 
     government the means to do things that a majority of Congress 
     might otherwise wish to do. The result will be legislation by 
     accounting decisions, reviewed by the courts.
       More narrowly, the Amendment is bad economics. It puts more 
     emphasis on the ritual idea of an annually balanced budget 
     than it should have. There may be times when it would be best 
     if the Federal Budget, however defined, should be in 
     prolonged surplus. The Balanced Budget Amendment does not 
     forbid this, but there can be no doubt that it works in the 
     direction of favoring exact balance. The economy may not 
     always suffer from inadequate national saving, as it does 
     now. So there may be times when the Federal budget should be 
     in deficit for a few years. We emphasize that we do not think 
     this is one of those times, but we can not say it will never 
     happen.
       Many economists have pointed out how perverse the Amendment 
     can be when the economy falls into recession. Then the 
     appearance of a cyclical deficit is a desirable, functional 
     event, not an undesirable one. At such a moment, the higher 
     taxes or reduced transfers or lower expenditures that would 
     be needed to restore balance will worsen the recession and do 
     relatively little to reduce the budget deficit. Of course 
     some escape mechanisms will be built into the amendment. But 
     they will inevitably be slow, uncertain in their scope, and 
     subject to manipulation by a minority. (This would be an 
     obvious occasion for dissidents to challenge the accounting 
     conventions in use.)
       We are strongly in favor of a gradual, appropriately 
     flexible program aimed at increasing the national saving rate 
     by reducing the Federal deficit. This is a hard thing to do, 
     given the voting public's desire to have public services and 
     social programs without paying for them by taxes. But that is 
     the sort of problem democracies have to learn to deal with in 
     the ordinary way, by legislation and executive action. 
     Getting the Constitution involved can only subvert our 
     political system and endanger our economy.
                                                                    ____

                         Statment of Jeff Faux,

       Economists are famous for producing a wide variety of 
     different answers to the same question.
       Yet there are some things on which there is--although never 
     a perfect consensus--wide agreement. The folly of a Balanced 
     Budget Amendment to the Constitution is one of them. Even 
     those who almost always disagree on budgetary and fiscal 
     policies believe such an amendment would seriously damage the 
     nation's ability to conduct sensible economic policy.
       The Amendment would: make economic policy making more 
     rigid, legalistic, and slow at a time when domestic and world 
     markets are increasingly volatile and complex; cripple 
     efforts to stabilize the business cycle; hamper the public's 
     capacity for making long-term investments in human and 
     physical capital; make it almost impossible to coordinate 
     economic policies with other nations; and, put macroeconomic 
     policy in the hands of the courts.
       The Balanced Budget Amendment is an irresponsible act that 
     will severely weaken the national capacity to cope with the 
     economic problems of the 21st century.
                                                                    ____

                    Statement of Lawrence Chimerine

       My name is Lawrence Chimerine. I am Managing Director and 
     Chief Economist of the Economic Strategy Institute. I 
     appreciate the opportunity to testify before the Joint 
     Economic Committee on the advisability of a constitutional 
     amendment to balance the federal budget.
       In sum, my views are as follows:
       a. While the Clinton administration economic and budget 
     program enacted in 1993 has dramatically improved the deficit 
     outlook, future deficits will still be unacceptably high 
     without further policy actions. In particular, while the 
     deficit is now falling, most projections suggest that it will 
     start rising again in approximately two years, and will 
     continue to rise substantially into the next decade.
       b. Deficits do matter. In particular, cutting the deficit 
     is the only reliable way to increase our anemic national 
     saving rate in order to provide for higher investment in the 
     long term--this is necessary to increase productivity, 
     improve our international competitiveness, and to create a 
     rising standard of living for most of our citizens. Cutting 
     the deficit will also bring down real interest rates and 
     reduce our dependence on foreign capital, both of which are 
     also desirable in the long term.
       c. There is no simple rule to guide future deficit 
     reduction. My own view is that a multi-year deficit reduction 
     program should be enacted as soon as possible to reduce the 
     projected deficit in ten years by at least one-half, but to 
     allow for delays of part or all of the policy actions if 
     economic growth in any year is below a specified minimum 
     level. This will avoid excessive fiscal drag at a time when 
     the economy may already be weak, but at the same time will 
     generate confidence in financial markets that significant 
     future deficit reduction will occur in order to get the 
     maximum impact on long term interest rates as soon as 
     possible.
       d. Despite my view that it is important that we bring down 
     future budget deficits, I am strongly against enactment of a 
     balanced budget amendment, for several reasons. First, 
     striving for a balanced budget in the year 2002 may create 
     too much fiscal drag, especially during the next several 
     years when the effect of recent increases in interest rates 
     and other factors begin to slow economic growth. Thus, it may 
     not be good fiscal policy--at a minimum, it may be necessary 
     to stretch out the period for reaching a balanced budget 
     considerably. Secondly, it will be extraordinarily difficult 
     to achieve a balanced budget in the year 2002 without 
     decimating some major programs which are important for our 
     economic and/or social well being, or without significant tax 
     increases. This would be especially the case if defense, 
     social security benefits, and some other entitlements, as 
     well as the now large interest component of federal spending, 
     are excluded from cuts--this would require extraordinarily 
     large cuts in other programs. Since many of these programs 
     affect the poor, many people will be badly hurt, or it will 
     force state and local governments to sharply raise taxes in 
     order to reduce their pain. Spending cuts are also likely to 
     affect programs that are
      needed to help build for the future, including public 
     infrastructure, support for research and development, 
     education, etc.--this too would be unwise. Third, the 
     requirement to balance the budget in every year would make 
     the business cycle worse by requiring spending cuts or tax 
     increases during recessions, exactly the opposite of sound 
     macroeconomic policy. Fourth, it will likely result in 
     budget gimmickry, such as the use of optimistic 
     assumptions, putting programs off budget, etc. to reduce 
     the difficulty in actually facing up to the spending cuts 
     or tax increases that would be required. In the long run 
     this could actually make future deficits even worse.
       e. I am particularly concerned about consideration of a 
     balanced budget amendment at the same time that there appears 
     to be a head-long rush to enact sizeable tax cuts and to 
     increase the defense budget, and to make it more difficult to 
     raise taxes in the future. Needless to say, the huge revenue 
     losses from the tax cuts now being proposed will make it even 
     more difficult to even come close to balancing the budget in 
     the years ahead, or even in fact to put the deficit on a 
     downward trend. Furthermore, while no one likes tax 
     increases, it is not desirable to reduce our future 
     flexibility on the tax side because we may reach a point 
     where tax increases are necessary in order to reduced budget 
     deficits, or to fund vital programs.


                  the evolution of the deficit problem

       Many still believe that the enormous deficits of the last 
     fourteen years have been the result of overspending by 
     Congress. However, today's massive deficits, as well as those 
     during the 1980s, were directly attributable to the misguided 
     economic policies that were implemented in the early 1980s 
     under the banner of supply-side economics. Multi-hundred 
     billion dollar deficits for as far as the eye can see were 
     predictable at that time because:
       1. The mythical spending cuts that would supposedly result 
     from the elimination of waste, fraud, and abuse were 
     enormously exaggerated from day one.
       2. The incentive effects of supply-side tax cuts were 
     inconsistent with most empirical evidence, and thus were 
     enormously overstated.
       3. Thus, not only did the big military spending increases 
     and large tax cuts put massive pressure on the deficit, but 
     the anticipated spending offsets, and the added revenues from 
     economic growth, could never and did never materialize.
       4. Furthermore, the explosion in health care costs and 
     other entitlements have pushed the cost of those programs far 
     beyond earlier expectations.
       5. The problem was worsened by the use of extremely 
     optimistic (and usually inconsistent) economic assumptions, 
     understatement of program costs, budgetary gimmicks, etc. 
     which enabled the Reagan administration to consistently 
     present
      budgets that were projected to be in balance, when in truth 
     there was virtually no possibility of that occurring.
       6. Finally, the problem began to feed on itself. The 
     inaccurate projections created an attitude of indifference 
     and neglect which prevented any real solution to the deficit 
     problem, thereby causing the national debt to skyrocket so 
     that interest on the debt began to grow at an enormous rate.


                            budgetary myths

       The move toward a constitutional amendment to balance the 
     budget clearly reflects the frustration which currently 
     exists in the Congress regarding the inability to effectively 
     deal with the deficit problem, as well as an effort to find a 
     way to avoid making the hard decisions. It also appears to be 
     an indirect admission of guilt by the Congress that they in 
     fact are also responsible for the budgetary mess. The real 
     problem, as mentioned earlier, was the lack of leadership by 
     the Reagan Administration during those years, and the 
     spreading of a number of budgetary myths that perpetuated the 
     inaction. As indicated earlier, these included the following:
       1. Waste, fraud and abuse--the idea that multi-billions 
     could be saved by eliminating waste, fraud and abuse in 
     government programs--a painless solution that was absurd from 
     day one.
       2. Tax cuts would pay for themselves (even more than pay 
     for themselves) because of 
     [[Page S2121]] strong incentive effects which would create 
     faster economic growth--there was no legitimate economic 
     evidence to support the conclusion that the large tax cuts 
     enacted in the early 1980s would have the huge impact on 
     savings, investment, and work effort that had been predicted, 
     nor would it produce the strong economic growth which 
     underlied economic and budgetary projections at that time. As 
     a result, it was clear that the tax cuts would result in 
     substantial revenue losses, which is exactly what happened. 
     The assertion by many that the problem is not on the revenue 
     side because tax revenues actually increased as a result of 
     the tax cuts of the early 1980s is inaccurate. Both personal 
     and corporate income tax collections as a share of income and 
     profits respectively are far below where they were a decade 
     ago--total tax revenues are roughly at the same ratio of GNP 
     as they were prior to the enactment of the supply-side 
     program primarily because of the big increase in Social 
     Security taxes enacted in the mid-1980s, and because of other 
     tax increases enacted along the way.
       3. We will grow our way out of it--this was another form of 
     the argument stated above, which, as mentioned earlier, was 
     insupportable from day one.
       4. State and local budget surpluses will offset the Federal 
     deficit--this too was a red herring which was employed by 
     those who were belittling the deficit in the 1980s. State and 
     local surpluses were never large enough to come anywhere near 
     offsetting Federal deficits.
       5. Deficits don't matter--when all the arguments mentioned 
     above turned out to be wrong, it was asserted by the Reagan 
     administration that deficits don't really matter anyway. They 
     cited the economic expansion of the 1980s, despite the 
     deficit, as proof. Of course, as many of us pointed out at 
     the time, we were able to attract massive sums from overseas 
     to help finance those deficits and extend the economic 
     expansion--any reasonable expectation was that the flow of 
     capital from overseas would eventually fade out, as has now 
     been the case.
       6. The deficit is due to Congressional overspending--once 
     previous Administrations ran out of rationalizations, the 
     blame shifting began. The truth is, however, that Congress 
     has appropriated less money for discretionary programs 
     (usually in defense) than the Administration asked for in ten 
     out of the twelve years between 1980 and 1992. In fact, 
     discretionary non-defense spending and grants-in-aid to State 
     and local governments were cut substantially during the 
     1980s, not only relative to earlier current service 
     projections, but as a share of the total budget, and as a 
     share of total GNP. Many domestic programs have fallen 
     sharply in real terms as a result.
       We all know why the deficit is still huge and why the 
     problem has not been addressed. It's because of dishonesty in 
     the budgeting process, and lack of leadership from previous 
     Administrations, which resulted in a series of proposed 
     budgets which purportedly balanced the budget in ``out 
     years'' based completely on mythical savings, extraordinarily 
     optimistic assumptions, budgetary gimmicks, program 
     understatements, etc. The problem was essentially assumed 
     away. Perhaps Congress should have taken the lead on its own, 
     but it was unrealistic to expect 535 Senators and 
     Congressmen, each with their own constituents, to take the 
     lead on a matter like this.


                      the current deficit outlook

       The Clinton Administration and Congress enacted the most 
     significant deficit reduction package in 1993 since the 
     problem developed. The combination of spending cuts and tax 
     increases enacted will reduce total deficits in the 1994-1998 
     period by almost $500 billion and will also reduce the level 
     of the deficit each year beyond that time. Furthermore, 
     unlike previous attempts to reduce the deficit, this is real 
     deficit reduction--it was based on realistic economic 
     assumptions and estimated impacts of the specific policy 
     actions, so that the actual reduction in the future will 
     closely match the estimates provided at the time the budget 
     plan was implemented.
       Unfortunately, however, the deficit outlook is still poor. 
     While the deficit in the next two fiscal years will be about 
     half of the near $350 billion annual level experienced in the 
     early 1990s, in great part because of the new deficit 
     package, as well as because of the economic recovery, 
     virtually all projections indicate that the deficit will 
     begin to rise again by fiscal 1997, and all continue to rise 
     at a substantial rate into the next
      century. For example, the Congressional Budget Office is now 
     projecting that the deficit will rise to over $400 billion 
     in the year 2004, from the approximately $180 billion 
     projected for fiscal years 1995 and 1996. These 
     projections imply increases in the deficit to GDP ratio, 
     and in the national debt to GDP ratio. In great part, this 
     reflects the bottoming out of defense spending near the 
     end of this decade, as well as continued increases in the 
     cost of the entitlements. Furthermore, this horrendous 
     deficit outlook is in reality even worse because it 
     includes sizable surpluses from the Social Security trust 
     fund--when these trust fund surpluses begin to be paid in 
     benefits early in the next century, the unified deficit is 
     likely to skyrocket unless steps are taken to reverse 
     current trends.


                    cutting the deficit is important

       This outcome is unacceptable. It should now be clear that 
     these enormous deficits do matter. They have already begun to 
     slowly suck the vitality out of the U.S. economy by squeezing 
     out productive investment, keeping real interest rates 
     extraordinary high, increasing our dependence on foreign 
     capital, reducing the effectiveness of fiscal policy as a 
     stabilization tool, and by creating pressures on those 
     Federal programs that are needed to help build our economy 
     for the future. In my view, the urgency to reduce the deficit 
     is even greater now than it was in previous years, for the 
     following reasons:
       1. Personal savings have declined since the 1980s, despite 
     the supply-side incentives, thus reducing the supply of 
     domestic savings.
       2. The flow of capital from Japan, Germany, and other parts 
     of the world, which helped fund our deficits in the 1980s 
     when we were the world's major capital importer, has slowed 
     dramatically. This is resulting from the fact that many of 
     those countries are no longer generating surpluses at the 
     same degree as they were previously, and because other parts 
     of the world have become large capital importers as well.
       3. A consensus is finally developing that the most critical 
     need in the United States is to improve our productivity and 
     competitiveness--we can no longer grow, as we did in the 
     1980s, by building empty office buildings and patriot 
     missiles, and by leveraging the system, while long-term 
     growth factors are deteriorating. It is clear that reversing 
     the weak trend of productivity and improving our 
     international competitiveness will require substantial 
     increases in investment, including modernizing our capital 
     stock, investing in education and job training, and 
     rebuilding our infrastructure. High real long-term interest 
     rates, largely caused by massive deficits at a time of lower 
     domestic savings and a reduced inflow of foreign capital, 
     will discourage some of our needed investment.
       In effect, it is essential that we create invest-led growth 
     in the United States in order
      to begin to build for the future. But to do that, the 
     federal deficit must be gradually reduced in order to free 
     up more of our savings to finance private investment, and 
     to reduce real long-term interest rates. Furthermore, it 
     is essential that government priorities be changed at the 
     same time that deficits are reduced--clearly, more federal 
     spending is needed for rebuilding the existing 
     infrastructure and developing the infrastructure of the 
     future, improving the quality of education, funding more 
     non-defense research and development, and for other such 
     programs that will both directly improve U.S. 
     productivity, and help begin to rebuild the U.S. economy. 
     The challenge of course is how to do both--across the 
     board spending cuts, or any other method that does not 
     result in the necessary change in priorities, will not be 
     sufficient if our objective is to get the U.S. economy on 
     the right course for the future.


             A balanced budget amendment is not the answer.

       Despite the urgency of reducing future budget deficits, I 
     am strongly opposed to the enactment of a balanced budget 
     amendment. In my judgment, it is simply another gimmick like 
     those that have been implemented in the last six or seven 
     years, beginning with Gramm-Rudman, which have had very 
     little, if any, impact. It will not only be an ineffective 
     tool in dealing with the problem, but in my view is simply a 
     way to attempt to avoid what will be difficult choices, and 
     place the blame for any unpopular spending cuts or tax 
     increases on a mechanical formula rather than on Presidential 
     or Congressional decisions. In brief, my concerns, are as 
     follows:
       1. Which budget is to be balanced? Is it the structural 
     budget deficit, the unified budget deficit,the on-budget 
     deficit, etc.? Should government investment be included or 
     excluded? Answers to these and similar questions are not 
     intuitively obvious.
       2. It is likely to encourage even more use of optimistic 
     forecasts, program underestimation, moving programs off-
     budget, and other similar techniques in order to avoid the 
     tough decisions that will be needed to be made to actually 
     balance the budget. Thus, the balanced budget amendment has 
     the potential of making the budget process even more flawed 
     than it was in the 1980s. We are also likely to see the 
     adoption of more gimmicks that produce short-term revenue 
     gains at the expense of revenue loss beyond the balanced 
     budget period, which will simply make the long-term problem 
     even worse.
       3. There are times when a balanced budget may be 
     undesirable. These may include periods of recession or slow 
     growth, wartime periods, or situations when domestic 
     emergencies might exist. In my view, it will be difficult to 
     plan for all these contingencies in a balanced budget 
     amendment, and any effort to offset these factors will be 
     harmful to the economy. Furthermore, its goal of reaching a 
     balanced budget in a relatively short period of time may 
     create too much fiscal drag too rapidly.
       4. In my view, if will probably make it more difficult for 
     us to deal with our other
      critical budget problem, namely reorienting our priorities, 
     because the tendency will be to look for the easiest ways 
     of cutting the deficit, rather than those that are best 
     for the economy.
       5. What if, in fact, a balanced budget isn't achieved 
     because the economic assumptions turned out to be incorrect, 
     even if they were reasonable in the first place? How do we 
     make adjustments for it? Who gets penalized? These are also 
     difficult issues that would have to be covered.
       [[Page S2122]] 6. Efforts to enact major tax cuts at the 
     same time that the balanced budget amendment is being debated 
     is the height of cynicism, especially the tax cuts that have 
     been proposed in the Republican Contract with America. Those 
     tax cuts would generate sizable revenue losses, especially in 
     the out years, making what will already be an extraordinarily 
     difficult task of substantial deficit reduction (let alone a 
     balanced budget) in seven years virtually impossible without 
     almost a near dismantling of government programs except for 
     social security and national defense. This is the height of 
     cynicism, as well as horrendously bad social and economic 
     policy.
       It is also important to remember that the Federal budget, 
     by its sheer size, and because of its role as a stabilization 
     tool, should not be considered in the same way as an 
     individual state or local government.


                         how to cut the deficit

       While additional long term deficit reduction is thus 
     essential, this must be balanced with two other objectives. 
     First, it is important that we do not further undermine the 
     use of fiscal policy as a stabilization tool. In particular, 
     it would be counterproductive to cut the deficit so quickly 
     that we would dramatically weaken the economy when it is 
     already operating below full employment. Second, we need to 
     reduce future deficits in a manner that would not make it 
     more difficult for us to deal with our other critical budget 
     problem, mainly reorienting our priorities away from 
     consumption and more toward public investment and other 
     expenditures that are needed to support long term economic 
     growth.
       I suggest the following approaches an alternative to a 
     balanced budget amendment.
       1. Unfortunately, there is no precise rule of thumb or 
     model simulation which can give us the optimum path for 
     future deficit reduction. In my view, an appropriate 
     objective would be to cut the $400 billion deficit now 
     projected by CBO for 2004 in half--this would suggest that 
     over the next 10 years the nominal deficit would be roughly 
     flat, implying a gradual decline in the deficit in real 
     terms, in the deficit as a share of GDP, and even more 
     importantly, in the debt to GDP ratio. Such a target would 
     imply putting in place approximately $15-20 billion per year 
     of budget restraint for each year over the ten year period--
     in my judgment, with the
      safeguards I will list below, I think this is doable and 
     will not create too much fiscal drag on the economy.
       2. Spending cuts should be the top priority. In view of the 
     large cuts in non-defense discretionary programs in the 
     1980s, and given the need to increase spending in some of 
     these areas, it is unlikely that huge savings will be 
     realized from this sector of the budget. Thus, spending cuts 
     must come from additional reductions in military spending, 
     from an effective health care cost control program, and from 
     slowing the enormous growth in the entitlements, especially 
     the pension and health programs. I would suggest that the 
     concept of entitlements is no longer something that this 
     country can afford. All of the so-called entitlement programs 
     must be slowly converted to means testing, either by scaling 
     back benefits for upper income and high wealth individuals 
     and/or by increasing taxes on those benefits. We should 
     reduce (not eliminate) benefits for those who could do with 
     less--households and individuals with modest means should be 
     spared. Furthermore, consideration should be given to further 
     extending the retirement age for full benefits. Scaling back 
     of health and pension benefits should not apply only to 
     entitlement programs--public employees are now receiving 
     extremely generous benefits which are no longer affordable. 
     Finally, I would suggest that any reductions in social 
     security benefits partly be earmarked for investments to 
     build for our future, especially for education and other 
     programs which benefit primarily younger people. In effect, 
     we would be reducing benefits for the elderly to be used to 
     make a better life for their children and grandchildren.
       3. Deficit reduction must be fair. In particular, it is now 
     well documented that most of the benefit of the tax cuts of 
     the 1980s went to those in the upper income groups--in the 
     meantime, large social security tax increases and budget cuts 
     have significantly reduced after-tax incomes for many low and 
     middle income families. This has only been partly reversed in 
     the 1993 budget package. Thus, it is important that deficit 
     reduction be structured in a way that the impact is greatest 
     on those who can afford it. Many will make the argument that 
     increases in taxes on upper income individuals will create 
     huge disincentives for savings and investment and thus would 
     be counterproductive--however, as we learned in the 1980s, 
     these arguments are exaggerated. Furthermore, the economy can 
     not function effectively when a large and increasing share of 
     purchasing power and wealth is concentrated in relatively few 
     hands--this holds down demand and thus will prevent long term 
     growth.
       4. The arithmetic is very clear--even with the phasing-in 
     of entitlement reform and some additional cuts in defense and 
     non-defense discretionary programs, some tax increases (not 
     tax cuts) will be needed in order to reduce deficits to 
     acceptable levels. The assertion that the problem is not on 
     the revenue side because tax revenues have actually increased 
     as a result of the tax cuts of the early 1980s is inaccurate. 
     Both personal and corporate income tax collections as a share 
     of income and profits, respectively, are below where they 
     were a decade ago--total tax revenues are roughly at the same 
     ratio of GDP as they were prior to the enactment of the 
     supply-side
      program primarily because of the big increase in Social 
     Security taxes enacted in the mid-1980s, and because of 
     other tax increases enacted along the way.
       In my view, increased revenues should come first from 
     eliminating counterproductive tax expenditures (incentives, 
     exemptions, etc.) now in place, and then secondly, if more 
     revenues are needed, from increasing taxes in a progressive 
     manner on activities that we want to consume less of. Thus, 
     broadening the tax base and consumption taxes should be 
     considered before across the board tax increases. In the 
     former category, some candidates are the following: 
     eliminating or scaling back the interest deduction on mergers 
     and acquisitions; scaling back the deduction for corporate 
     advertising expenses and/or for corporate entertainment; a 
     lower limit on the mortgage interest deduction than is now in 
     place; taxation of a portion of corporate health care 
     insurance premiums (this may also be helpful in controlling 
     health care costs).
       5. Most importantly, I believe that to the extent possible, 
     a multi-year program designed to bring about the amount of 
     deficit reduction described above should be adopted as soon 
     as possible. This would be desirable for several reasons. 
     First, it would avoid having to go through the torturous 
     process on an annual basis--the medicine can all be taken at 
     once. Second, and more importantly, one way to reduce the 
     effect of fiscal drag on economic growth is to bring interest 
     rates down as quickly as possible, especially long term 
     rates--this can be best accomplished if the markets believe 
     that a credible program to reduce future deficits is in 
     place. While easier Federal Reserve policy can also help, the 
     Federal Reserve has lost most of its control over long term 
     interest rates. Convincing the markets that the federal 
     demand for credit will be dramatically reduced in the future 
     will be a more effective way to bring down long term interest 
     rates than an easier monetary policy.
       6. It is possible to design a multi-year deficit reduction 
     program that can allow some flexibility to deal with 
     emergencies and recessions. This will prevent fiscal policy 
     from worsening economic downturns. If these exceptions are 
     truly limited, they are not likely to undermine the 
     credibility of the long term program. I suggest that the 
     deficit reduction program be accompanied with an ``escape 
     clause'' in the form of a minimum level of GDP or employment 
     growth, or a threshold unemployment rate, beneath which 
     future installments of deficit reduction will be delayed or 
     scaled back in order not to create an even weaker economic 
     environment. This is particularly important since the current 
     level of economic activity is so low that the economy is 
     likely to be underutilized for many years.

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