{page 1} MEETING WITH GOP SENATORS BALANCED BUDGET 6:00 P.M. - s-230 Wednesday, June 3 :selected: Dole Thurmond Hatc Kasten - not sure Crai Domenici - will be late Packwoo Gramm McCain Mack - will call back Gorton Warner Brown - will be late Nickles Specter - has a conflict that he cannot change Burns Smith {page 2} MEETING WITH GOP SENATORS BALANCED BUDGET 6:00 P.M. - s-230 {crossed out: {illegible}} :selected: Dole :selected: {crossed out: Thurmond} :selected: {crossed out: Hatch} :selected: {crossed out: Kasten} :selected: - not sure {crossed out: Craig} :selected: {crossed out: Domenici} :selected: - will be late {crossed out: Packwood} :selected: {crossed out: Gramm} :selected: {crossed out: McCain} :selected: {crossed out: Mack} - will call back :selected: {crossed out: Gorton} :selected: {crossed out: Warner} :selected: {crossed out: Brown} :selected: - will be late {crossed out: Nickles} :selected: {crossed out: Smith} :selected: Specter - has a conflict that he cannot change Dr. Lesher 659-6000 mon. -. Tues. 2:00 {page 3} 6:00 pm Wednesday June 3rd United States Senate WASHINGTON, DC 20510 {illegible} BALANCED BUDGET GROUP wcb THURMOND OK HATCH wcb KASTEN OK CRAIG - wcb. late OK DOMENICI OK PACKWOOD OK GRAMM - w.c.b. NO SPECTER OK McCain Mack - wcb. Gorton - ok ok Warner Brown will be late Nickles OK HATFIELD IS STRONGLY OPPOSED BUT OBVIOUSLY HAS AN INTEREST Invited ALREADY · Dole Cochran KASTEN Nickles GRAMM THURMOND Packwood HATCH {page 4} United States Senate WASHINGTON, DC 20510 Balance Budget Meeting {circled: Warner :selected: Craig Nickles :selected: Brown McCain Mack} {page 5} (see docx transcript for table) {page 6} United States Senate COMMITTEE ON FINANCE LLOYD BENTSEN, CHAIRMAN Bal Bud Mtg {crossed out: Stephens 795 2631} Nickles :selected: Mccain out · Thurmond. :selected: · Hatch . · Packwood. :selected: · Kasten. :selected: out · Domenici :selected: · Gramm :selected: out · Specter . :selected: · Craig . :selected: out OK c Kathy O to confirm I have everyone. {page 7} not going to happen today per Yvonne MEMORANDUM TO: Senator Dole FROM : Yvonne DATE : May 12, 1992 -- There will be a White House meeting today at 2:00 p.m. (1/2 hour) to discuss balancing the budget. The meeting will be bipartisan Senators only. Following are the Senators invited: Senator Thurmond Senator Hatch Senator Kasten Senator Craig Senator Phil Gramm Senator Simon Senator Domenici Shelby DeConcini Packwood NICKLES McCAIN Do you want to attend the meeting today at 2:00 p.m .? :unselected: yes :unselected: no Sheila has suggested a Republican mbrs meeting before mtg with the President. {illegible} 700M W/S Enterprise zone expan {illegible} tary prop {illegible} 2000/ed welfare reform {arrow pointing up} {illegible} test $10,000 Sununu / [illegible} o'neal cherry tree 180o turn around heavy container {page 8} (see docx transcript for table) {page 9} NOTES 1. Definitions All three types of proposals contain exactly the same definition of outlays and receipts: total receipts "shall include" all receipts of the United States except those derived from borrowing; total outlays "shall include" all outlays of the United States except those for repayment of debt principal. 2. Effective Date With some variations, each type of proposal provides that it takes effect no sooner than the second fiscal year beginning after its ratification. Kasten provides that the article takes effect "for fiscal year 1997 or for the second fiscal year after ratification, whichever is later." Stenholm provides that it takes effect "beginning with fiscal year 1995 or with the second fiscal year beginning after its ratification, whichever is later." Thurmond provides that it takes effect "beginning with fiscal year 1993 or with the second fiscal year beginning after ratification, whichever is later." Simon simply provides that it takes effect "beginning with the second fiscal year beginning after its ratification." 3. Waiver All three types of amendments contain provisions allowing waiver in time of war. There are differences in wording, however. Kasten provides that "Congress may waive" the provisions of the article for any fiscal year in which a declaration of war is in effect. Stenholm simply provides that its provisions "may be waived" for any fiscal year in which a declaration of war is in effect. Simon, as amended and reported by the Judiciary Committee, provides two cases in which its provisions may be waived: (1) Congress may waive the provisions for any fiscal year in which a declaration of war is in effect, and (b) the provisions may be waived for any fiscal year "in which the United States is engaged in military conflict which causes an imminent and serious threat to national security and is so declared by a joint resolution, adopted by a majority of the whole number of each House of Congress, which becomes law." 4. Balanced Budget Requirements and 5. Balanced Budget Mechanism The three types of proposals differ in the method by which a balanced budget is required. The Simon/Thurmond approach is to mandate that total outlays "shall not" exceed total receipts for any fiscal year. Stenholm mandates that estimated receipts for each year be specified in a law devoted solely to that subject and requires that outlays "shall not exceed" the estimated receipts set forth in the law. {underlined: Kasten specifies that Congress shall adopt a statement of receipts and outlays in which outlays do not exceed receipts and that "Congress and the President shall ensure that actual outlays do not exceed the outlays set forth in the statement."} 6. Provision for Excess in Outlays All three types of proposals contain very similar provisions for allowing an excess of outlays, i.e., a deficit. {underlined: Each requires a three-fifths vote of the whole number of each House. Stenholm and Simon, but not Kasten, require this to be a rollcall vote.} 7. Requirement for Presidential Budget All three types of proposals, except Thurmond, contain requirements regarding the President's budget. Simon and Stenholm require the President, prior to each fiscal year, to transmit to Congress a "proposed budget" for that fiscal year in which total outlays do not exceed total receipts. Barton requires the President, prior to each fiscal year, to transmit a "statement of receipts and outlays" for such year "consistent with the provisions" of the article. 8. Tax Limitations In addition to mandating a balanced budget, the three proposals all contain restrictions on increases in taxes or revenues. Simon requires a majority of the whole number of each House (or unanimous consent) to pass a bill "to increase revenue." Stenholm has the same requirement (without the unanimous consent alternative). Thurmond requires such a majority to pass "any bill for raising taxes." Kasten requires that the receipts set forth in the annual congressional statement required by the proposal shall not increase at a rate greater than the rate of increase in national income unless a three-fifths majority of the whole number of each House passes a law allowing such an increase. 9. Limitation on Federal Debt Stenholm requires that the limit on debt held by the public shall not be increased unless three-fifths of the whole number of each House provide by law for such an increase by rollcall vote. Kasten provides that (a) the amount of "Federal public debt" on the first day of the second year after ratification "shall become a permanent limit on such debt," and (b) there shall be no increase in such debt unless a law approving an increase is passed by three-fifths of the whole number of each House. The Simon and Thurmond proposals contain no provisions regarding Federal debt. 10. Provisions for Enforcement by Congress Self explanatory 11. Latest Legislative Activities Self explanatory App. II-4 {page 10} STENHOLM (H.J. Res. 290) "SECTION 1. Prior to each fiscal year, the Congress and the President shall agree on an estimate of total receipts for that fiscal year by enactment of a law devoted solely to that subject. Total outlays for that year shall not exceed the level of estimated receipts set forth in such law, unless three-fifths of the whole number of each House of Congress shall provide, by a rollcall vote, for a specific excess of outlays over estimated receipts. "SECTION 2. The limit on the debt of the United States held by the public shall not be increased unless three-fifths of the whole number of each House shall provide by law for such an increase by a rollcall vote. "SECTION 3. Prior to each fiscal year, the President shall transmit to the Congress a proposed budget for the United States Government for that fiscal year in which total outlays do not exceed total receipts. "SECTION 4. No bill to increase revenue shall become law unless approved by a majority of the whole number of each House by a rollcall vote. "SECTION 5. The provisions of this article may be waived for any fiscal year in which a declaration of war is in effect. "SECTION 6. Total receipts shall include all receipts of the United States Government except those derived from borrowing. Total outlays shall include all outlays of the United States Government except for those for repayment of debt principal. "SECTION 7. This article shall take effect beginning with fiscal year 1995 or with the second fiscal year beginning after its ratification, whichever is later.". THURMOND (S.J. Res. 9) "SECTION 1. Total outlays of the United States for any fiscal year shall not exceed total receipts to the United States for that year, unless three-fifths of the whole number of both Houses of Congress shall provide for a specific excess of outlays over receipts. "SECTION 2. Any bill for raising taxes shall become law only if approved by a majority of the whole number of both Houses of Congress by rollcall vote. "SECTION 3. The Congress may waive the provisions of this article for any fiscal year in which a declaration of war is in effect. "SECTION 4. Total receipts shall include all receipts of the United States except those derived from borrowing. Total outlays shall include all outlays of the United States except for those for repayment of debt principal. "SECTION 5. This article shall take effect beginning with fiscal year 1993 or with the second fiscal year beginning after the ratification, whichever is later.". KASTEN (S.J. Res. 182) "SECTION 1. Prior to each fiscal year, Congress shall adopt a statement of receipts and outlays for such fiscal year in which total outlays are not greater than total receipts. Congress may amend such statement provided revised outlays are not greater than revised receipts. Congress may provide in such statement for a specific excess of outlays over receipts by a vote directed solely to that subject in which three fifths of the whole number of each House agree to such excess. Congress and the President shall ensure that actual outlays do not exceed the outlays set forth in such statement. "SECTION 2. Total receipts for any fiscal year set forth in the statement adopted pursuant to the first section of this Article shall not increase by a rate greater than the rate of increase In national income in the second prior fiscal year, unless a three-fifths majority of the whole number of each House of Congress shall have passed a bill directly solely to approving specific additional receipts and such bill has become law. "SECTION 3. Prior to each fiscal year, the President shall transmit to Congress a proposed statement of receipts and outlays for such fiscal year consistent with the provisions of this Article. "SECTION 4. Congress may waive the provisions of this Article for any fiscal year in which a declaration of war is in effect. "SECTION 5. Total receipts shall include all receipts of the United States except those derived from borrowing and total outlays shall include all outlays of the United States except those for the repayment of debt principal. "SECTION 6. The amount of Federal public debt as the first day of the second fiscal year beginning after the ratification of this Article shall become a permanent limit on such debt and there shall be no increase in such amount unless three-fifths of the whole number of each House of Congress shall have passed a bill approving such increase and such bill has become law. "SECTION 7. Congress shall enforce and implement this Article by appropriate legislation. "SECTION 8. This Article shall take effect for the fiscal year 1997 or for the second fiscal year beginning after its ratification, whichever is later.". SIMON (S.J. Res 18) "SECTION 1. Total outlays of the United States for any fiscal year shall not exceed total receipts to the United States for that year, unless Congress approves a specific excess of outlays over receipts by three-fifths of the whole number of cach House on a rollcall vote. "SECTION 2. Prior to each fiscal year, the President shall transmit to the Congress a proposed budget for the United States Government for that year in which total outlays do not exceed total receipts. "SECTION 3. Any bill to increase revenue shall become law only if approved by a majority of the whole number of each House by a rollcall vote, unless such bill is approved by unanimous consent. "SECTION 4. The Congress may waive the provisions of this article for any fiscal year in which a declaration of war is in effect. "The provisions of this article may be waived for any fiscal year in which the United States is engaged in military conflict which causes an imminent and serious military threat to national security and is so declared by a joint resolution, ad- opted by a majority of the whole number of each House of Congress, which becomes law. "SECTION 5. Total receipts shall include all receipts of the United States except those derived from borrowing. Total outlays shall include all outlays of the United States except those for repayment of debt principal. "SECTION 6. This article shall take effect beginning with the second fiscal year beginning after its ratification.". {page 11} ECONOMICS & FINANCE THE BUDGET Balanced-Budget Amendment Suddenly Comes to Life Pressure to outlaw deficits under the Constitution sends lawmakers scrambling to sort out details {description: a black-and-white illustration of Article V of the United States Constitution. it is a white sheet of paper with a rolled top edge on a black background. the text reads "ARTICLE V The Congress, whenever two-thirds of both houses shall deem it necessary, shall propose amendments to this Constitution, or, on the application of the legislatures of two-thirds of the several States, shall call a convention for proposing amendments, which, in either case, shall be valid to all intents and purposes, as part of this Constitution, when ratified by the legislatures of ons of three-fourths of the several States," until it is cut off on the bottom by an illustration of the founding fathers.} If Dick Gephardt, Bob Dole and cloakroom wisdom are right, a beleaguered Congress will vote this year in favor of amending the Constitution to require a balanced federal budget. It will then be up to the states to decide if the amendment should become part of the supreme law of the land. But again, the morning line says that the required 38 state legislatures will go along, and in relatively short order. Has frustration over the steady rise in the federal deficit finally overcome institutional objections to placing such a severe restraint on Congress' power of the purse? Are enough liberal Democrats ready to take the pledge to provide the needed two-thirds majorities of the House and Senate to adopt a constitutional amendment? It appears so. House Majority Leader Gephardt, D-Mo., told an audience at Harvard University's Kennedy School of Government on May 4 that he expected debate on a balanced-budget amendment to begin in both chambers around June 1; he predicted that the measure would be adopted by both. On Capitol Hill, populist Bob Wise, D-W.Va., is one of several members who have approached Charles W. Stenholm, D-Texas, a leading proponent, in recent days to say they have gotten religion. "I think I'm at the altar," Wise told Stenholm at a House Budget Committee hearing April 29. "Amen," Stenholm replied. And on May 6, in a test vote of sorts, the House voted 322-66 in favor of language in the Senate version of the fiscal 1993 budget resolution (H Con Res 287) that exhorts the Senate to adopt a balanced-budget amendment by June 5. (Vote 107, p. 1300) Though Gephardt has long opposed using the Constitution to limit deficit spending, he has not decried the current rush to act. Participants in a recent meeting of House Democratic whips said he lamented the failure to bring the deficit under control. "Now we have to do something," he warned his colleagues. {paragraph selected} Senate Minority Leader Dole - a longtime amendment booster - agrees that Congress will send an amendment to the states this year. The Kansas Republican says he would "like to have a few word changes," however, starting with the name of the prime Senate sponsor, Paul Simon, D-Ill. {end selected paragraph} That quip - vintage Dole - masks a growing concern among some supporters, as well as some who oppose an amendment but are resigned to what they see as an inexorable force. If the country is going to take this path, they want to make sure it is well-lighted and that no one stumbles on hidden rocks. The sudden groundswell of support has them scrambling to refine the language and to think through a host of unanswered questions. "The issue is how to write [an amendment] that is effective," says supporter Pete V. Domenici of New Mexico, ranking Republican on the Senate Budget Committee. Congress voted once before, in the guise of the 1985 Gramm-Rudman anti-deficit law, to eliminate or at least restrain the deficit. For a variety of reasons - many of them baldly political - Gramm-Rudman did not work. As White House budget director Richard G. Darman told the House Budget Committee on May 6: "In its first year, the deficit was $221.2 billion; and in the last year [that Gramm-Rudman would have allowed a shortfall], the deficit was $220.4 billion." No one wants the same thing to happen again. Nor do members want to so hamstring Congress that it cannot effectively meet the country's needs or to tie its hands on fiscal policy in times of economic strife. Sudden Rush of Support Proposed balanced-budget amendments have been kicked around for years in conservative circles, but they have come to the floor of either chamber for a vote only four times. The high-water mark was 1982, when the Senate adopted an amendment, only to see it die in the House. The last time the Senate went on record, in 1986, the By John R. Cranford CQ MAY 9, 1992 -1233 {page 12} ECONOMICS & FINANCE (see docx transcript for table) But suddenly this year, the amendment has new life in Congress and is attracting support from unexpected, read liberal, quarters. Why now? The answer seems to be a combination of lawmakers' deep-seated despair over their inability to control the deficit and election-year anxiety over the public's low regard for Congress. (Weekly Report, p. 1140) "In principle, I'm against it," says Sen. Warren B. Rudman, R-N.H., whose frustration over the deficit prompted his decision in March not to seek re-election. "But this situation has me petrified. . . . A lot of very reasonable people have come to this conclusion." Many liberal Democrats, who traditionally have opposed such a restraint on government spending, share his concerns. Some - Reps. Joseph P. Kennedy II of Massachusetts and Patricia Schroeder of Colorado, for example - support the balanced-budget drive. "Deficit spending is a transfer from ordinary taxpayers to the wealthy holders of the paper," Kennedy argues, adding, "It's gotten to the point where interest [on the federal debt] exceeds all social spending." Sen. Howard M. Metzenbaum, D- Ohio, who has opposed a balanced-budget amendment, also complains of frustration about the deficit. "For the first time, I'm re-evaluating. But I'm not there yet." The growing support is all the more surprising because there has been little in recent years of the grassroots clamor for a balanced budget that was a hallmark of the early 1980s. The last time a state legislature passed a resolution calling for a con- stitutional convention to write a balanced budget amendment was 1983. (Story, p. 1236) Congressional committees have paid only a smattering of attention to the issue, and there is little up-to-date analysis of how an amendment would work - if it would work at all. The House Budget Committee has now launched a series of hearings. Chairman Leon E. Panetta, D-Calif., an amendment foe, promises to air thoroughly all questions about the need for amending the Constitution. "This is a serious step, and we need to evaluate its implications for the Constitution, as well as for this body," he told the House on May 6. "The devil is in the details," worries Stephen Bell, former Republican staff director of the Senate Budget Committee and now a managing director in the Washington office of Salomon Brothers. "It's a hell of a lot harder to change a constitutional amendment than a law. They have to be very careful that any amendment ... gets done what they want to get done," he says. "What you want to do is make sure it isn't a hoax." Even some deficit hawks have raised voices of caution. "Adherence to a balanced-budget rule would severely limit the government's ability to stabilize the economy," warns Robert D. Reischauer, director of the Congressional Budget Office (CBO). In particular, he told House Budget on May 6, a balanced budget amendment could neutralize the economy's automatic stabilizers, such as unemployment insurance, which cause spending to rise to offset the effects of slow growth. But such concerns appear secondary to the broader worry about the size of the deficit. What Would an Amendment Do? Two slightly different versions of a balanced-budget amendment are getting the most attention on Capitol Hill. Both closely track amendments that were defeated in prior Congresses. Both seem to enjoy broad support. And both are criticized by some Republicans as not going far enough. Simon's amendment (S J Res 18) was approved on an 11-3 vote in the Senate Judiciary Committee on May 23, 1991. It has 27 cosponsors, half of whom are Democrats. (1991 Weekly Report, p. 1363) In the House, Stenholm introduced H J Res 290, which has 275 cosponsors, 116 of them Democrats. Stenholm hopes the Judiciary Committee will consider the amendment soon. But even without committee action, there would plainly be more than the required 218 members willing to sign a discharge petition to bring the amendment straight to the House floor. Simon's is the simpler of the two. It would require that total federal government outlays (actual spending) not exceed the government's total receipts for a given year. It would take three-fifths of the total membership (not just those present and voting) of each chamber to override this requirement. Even then, the deficit could not rise freely: Congress would have to approve a specific deficit amount. Simon's amendment would also require the president to submit a balanced budget for each fiscal year. A bill to increase revenue could be enacted only if it were approved by a majority of the entire membership of the House and Senate. Congress could waive the requirements in the event of a declared war or when an enacted law declared that an ongoing military conflict threatened national security. 1234 - MAY 9, 1992 CQ {page 13} ECONOMICS & FINANCE (see docx transcript for table) Stenholm's amendment differs in two significant respects. First, it would require Congress and the president to "agree on an estimate of total receipts ... by enactment of a law devoted solely to that subject." Actual outlays for a particular year could not exceed that revenue estimate, unless three-fifths of both chambers voted to permit a specific deficit. Second, Stenholm would require a three-fifths majority in both chambers to pass any bill that increased the limit on federal debt. The debt limit - a statutory ceiling on the government's total accumulated deficits - must be increased periodically to accommodate additional borrowing. Under current law, raising the debt limit requires only a simple majority. Other provisions of Stenholm's amendment are identical or nearly so to Simon's. It is expected that the states would have seven years to ratify the constitutional change; each would take effect in the second fiscal year after ratification. Would It Really Work? Not surprisingly, neither Simon nor Stenholm see particular problems with their proposals. Simon says that he believes Congress and the president would willingly comply with a constitutional mandate. He adds that he sees no problem in the Supreme Court declaring an enacted appropriations bill unconstitutional, if that were to be necessary. "The judiciary obviously enforces the laws and Constitution," he says. Others, however, some of whom are just turning their attention to the subject, see plenty of problems. "It won't do the job. There are too many loopholes in it," says Sen. Carl Levin, D-Mich., a staunch amendment opponent who nevertheless advocates attacking the deficit. "It will be just another excuse to do nothing to reduce the deficit for five more years." "Frankly, it's not magic .... It's hard to enforce," Domenici concedes. Analyses by CBO and the Congressional Research Service (CRS) raise a multitude of potential problems: An amendment barring outlays in excess of revenues - the approach used by both Simon and Stenholm - sounds simple enough. But, as CBO pointed out in a 1982 study (the last time the agency looked closely at the subject), "Congress does not directly control the level of either." Both are estimates that are subject to mistake and manipulation. Although Congress appropriates every dollar, the rate at which the money is spent is determined by many factors - the number of people qualifying for a program, the progress of a defense contractor in fulfilling an order, and the level of unemployment, for example. Moreover, some spending - interest on the federal debt and Social Security benefits, for instance - is paid out without Congress appropriating a specific amount. And while Congress establishes rates of taxation, it can only guess at how much taxpayers will earn and therefore how much tax will be collected. A more recent study, by CRS, raised dozens of questions of legal interpretation. CRS analyst James V. Saturno examined a 1990 balanced-budget amendment that closely resembles CQ MAY 9, 1992 - 1235 {page 14} ECONOMICS & FINANCE The Drive To Convene a Convention {description: a black-and-white copy of the painting "Scene at the Signing of the Constitution of the United States" (1940) by Howard Chandler Christy.} U.S. CAPITOL HISTORICAL SOCIETY The signing of the constitution in 1787. Activists have been trying for nearly 20 years to build support for a balanced-budget amendment - not in Congress but in the state legislatures. Taking the alternate route for amending the Constitution, they have campaigned to get two-thirds of the states to call a national convention. The effort peaked in the early 1980s, with 32 of the necessary 34 states approving a convention call. Since then, there has been little action, but, as the issue of a balanced budget picks up steam on Capitol Hill, there are signs of new life on the state level. Legislatures in Wisconsin, New Jersey, Minnesota and Ohio are all considering resolutions this year. And organizers hope that if Congress does not act in 1992, pressure from the states will grow. The Constitution provides that amendments can originate either in Congress or in a state-initiated constitutional convention. But all past efforts to call such conventions have died for lack of sufficient state support. As a result, it is not entirely clear how a meeting would be convened or how the drafting would be carried out. However, three-fourths of the states would have to ratify the results, just as they would a congressionally approved amendment. In 1975 the National Taxpayers Union, a Washington-based lobbying group, began the grass-roots campaign to get state legislatures to call for a convention to deal with the growing federal deficit. (The shortfall at the time was $53.2 billion. A near record high then, it looks decidedly modest compared with the $300 billion to $400 billion deficit expected in fiscal 1992.) By 1980, 30 states had passed resolutions. But as the campaign moved closer to forcing a convention, the political opposition stiffened. "By the time you get around 32 or 33 [states], the stakes are rising," said Frank Sorauf, a political science professor at the University of Minnesota at Minneapolis. "[The] politics become more serious and more real." Powerful politicians, including President Jimmy Carter and Senate Budget Committee Chairman Edmund S. Muskie, D-Maine, began speaking out against tampering with the Constitution, according to Sorauf. The AFL-CIO also began a state-by-state drive to defeat the initiative. Critics argued that interest groups, including the National Taxpayers Union, could use the convention to radically rewrite the Constitution, proposing anything from a line-item veto to a return to the gold standard. Supporters insisted that there are safeguards to prevent a runaway convention: Congress could pass a convention procedures bill ensuring an orderly process, and nothing could be added to the Constitution without the approval of 38 states. The critics prevailed, however, and the effort stalled. In 1983, Missouri became the 32nd and last state to approve a resolution. The National Taxpayers Union tried to keep the drive alive through the 1980s, but the cause, often championed by conservative Republicans, found an unsympathetic audience in the 18 remaining state legislatures, 17 of which were controlled by Democrats. As the decade came to a close, the movement seemed to slip backward. Florida, Alabama and Louisiana rescinded their resolutions; it is not clear whether the rescissions are technically legal, but organizers assume that they need five more states. While the state effort seems to be receiving little attention at the moment on Capitol Hill, organizers hope it will push federal lawmakers forward. "Most state legislatures are willing to give Congress the chance to get it done. Next year will really up the pressure," said Al Cors, director of government relations for the National Taxpayers Union. Supporters see precedents in past convention drives. In 1911, 30 states, one shy of the two-thirds necessary, called for the popular election of U.S. senators. Congress responded. An amendment was approved and made part of the Constitution within two years. "If they get the requisite number of states, it puts enormous pressure on the Congress to propose and ap- prove an amendment," said Sorauf. "[It's] an expression of popular will." -Paul Nyhan {continuing from page 13} Stenholm's and identified enforcement problems, starting with the opening requirement that Congress and the president "agree" - something not required anywhere in existing law. Saturno wondered about the timing of a revenue estimate bill: Could it be enacted after the appropriations bills, for instance, enabling Congress to spend what it wants and then "estimate" that there will be sufficient revenue? He also suggested that a simple majority could "evade the intent of the requirements for a supermajority vote to permit excess outlays," by taking the step of changing the revenue estimate. Saturno found other opportunities for Congress or the president to circumvent the intention of the amendment by changing the dates of the fiscal year or adjusting economic assumptions that underlie revenue estimates. And he speculated that Congress would be put in the awkward position of regularly trying to rescind previously enacted appropriations, because the amendment would likely be triggered only by information that actual outlays were about to breach the revenue target. He concluded: "The lack of an enforcement 1236 - MAY 9, 1992 CQ {page 15} ECONOMICS & FINANCE enforcement clause in this proposal makes it unclear whether any action could be taken to ensure that balance was achieved, and even if it could, who would be required to take it, when would it take place or even who would have standing to compel compliance." GOP Concern About Taxes Beyond those enforcement concerns, many Republicans are unhappy that Democrats are driving the process and that the amendments under discussion would erect only the smallest of barriers to using tax increases to offset the deficit. "A lot of Democratic members think it will compel a bipartisan tax increase," Bell says. The Wall Street Journal agreed in an April 29 editorial headlined, "Simon's Tax Increase," denouncing liberal support for a balanced-budget amendment as "political camouflage." And President Bush has insisted that a balanced-budget amendment include "safeguards against a resort to higher taxes as the means of complying with the constitutional mandate." Sen. Bob Kasten, R-Wis., is promoting a change in Simon's amendment that would require a three-fifths majority vote in each chamber to enact a revenue increase larger than the growth rate of the economy. Rep. Joe L. Barton, R-Texas, is sponsoring a similar idea in the House. Simon and Stenholm reject the idea of requiring more than a simple majority to approve tax increases. Most Democrats - and some Republicans - appear to believe that the best course would be to allow Congress and the president to choose from among a combination of tax increases and spending cuts. There may be a battle on this point, especially in the Senate. But even Republican advocates of the Kasten-Barton approach don't hold out a lot of hope that they will prevail. Raising Consciousness If a balanced-budget amendment is submitted to the states, House Democratic leaders in particular think that would also be an appropriate time for Congress to begin debating seriously just how to cut the deficit. "We ought to set ourselves a goal of reducing the deficit systematically on a year-by-year basis until we reach the year in which it becomes effective," Speaker Thomas S. Foley, D- Wash., told reporters May 7. "It would be disastrous to wait." Step 2: Ratification Getting a constitutional amendment through Congress is only the first step. The measure must then be ratified by three-fourths (38) of the states within a period set by Congress; in recent times that has been seven years. Since 1960, Congress has approved six amendments; four of them were ratified and became part of the Constitution. An amendment giving the vote to 18-year-olds set the record for quick ratification, winning approval just 100 days after it was cleared by Congress. By contrast, the Equal Rights Amendment (ERA), which would have outlawed discrimination based on gender, never got sufficient state support, despite the fact that Congress granted a 39-month extension. (see docx transcript for table) Panetta and Gephardt say they want to bring the constitutional amendment to the House floor in tandem with a bill that would shrink entitlement programs, cut defense and domestic discretionary spending - including outright elimination of entire programs and departments - and increase taxes. The details of such a bill remain to be fleshed out, but it is certain that Congress cannot eliminate a $400 billion deficit overnight, and even a piecemeal approach would entail big changes. Many Republicans are opposed to this approach, and Stenholm says it would be impossible to do this year. So Panetta is not sanguine that such a bill stands a chance of passage. "Members will probably vote for the amendment and then vote against doing anything," he says. However, many members of both parties - including supporters and opponents of a constitutional amendment - see an educational advantage to the process. Regardless of the amendment's success or failure, they think it is healthy to raise the level of public debate about spending and taxing choices. "We're making no choices now," Rudman says. "Maybe this is a way to get the American people to recognize what we're doing down here." Sending an amendment to the states "would raise the level of public debate," Levin agrees. But he wants to do that sooner than, say, 1993, when state legislatures may convene and find the proposed amendment on members' desks. "We ought to find a way to pressure the presidential candidates to address the issue," he says. For an amendment opponent such as Foley, showing members and the states just how deep the cuts might go could be invaluable in preventing ratification. "I think it would probably demonstrate right away something that has to be demonstrated - that this is not a painless exercise," Foley said. "It is going to affect every aspect of government activity and all reaches of the federal budget." But Foley holds out little hope that the amendment will die. "Everything I have seen from the state legislatures on this question indicates to me that it would be rapidly ratified and with probably less consideration, debate and judgment than perhaps any amendment ever submitted to the states in this century at least," he said. . CQ MAY 9, 1992 - 1237 {page 16} CBO TESTIMONY Statement of Robert D. Reischauer Director Congressional Budget Office before the Committee on the Budget U. S. House of Representatives May 6, 1992 NOTICE This statement will be available for public release at 10:00 a.m. (EDT), Wednesday, May 6, 1992. {logo of the Congressional Budget Office} CONGRESSIONAL BUDGET OFFICE SECOND AND D STREETS, S.W. WASHINGTON, D.C. 20515 {page 17} Mr. Chairman, and Members of the Budget Committee, I appreciate the opportunity to discuss with you the possible effects of a balanced budget amendment to the Constitution. Opinion polls indicate that the American public strongly favors a balanced budget amendment. And for good reason. People sense that continued deficits have contributed to sluggish economic growth and will undermine their children's standards of living. They also realize that concern over deficits has hampered our ability to address pressing national problems. Enactment of a balanced budget amendment is seen as a way to break out of the economic doldrums and to reenergize and redirect our governmental institutions. If only it were so simple. The problem has never been that the nation could not agree on the goal -- a greatly reduced deficit. Rather it has been that we could not summon up the will to achieve this objective because it requires sacrificing other desirable objectives -- namely, keeping taxes low and maintaining government services. Under certain circumstances, a balanced budget amendment could strengthen our resolve and ability to address the deficit problem. But under other circumstances, it could be little more than another empty promise, one that further erodes public confidence in our political institutions. Even in the {page 18} best of circumstances, a balanced budget amendment could limit the government's flexibility and distort its policies. In the remainder of my remarks, I will elaborate on these points and will put forth the following three propositions: o A large reduction in government borrowing is highly desirable over the long term; o A balanced budget amendment, on its own, does not advance the chances for lowering federal borrowing, and if it worked it would undermine the stabilizing role of the federal government; and o The only way to make a balanced budget amendment work is to take actions that achieve fiscal discipline during the ratification period. Lower Government Borrowing Is Desirable over the Long Term Without a doubt, there are very real benefits to be reaped from reducing government borrowing. Lower deficits would encourage economic growth in the long term by raising net national saving and investment, and would reduce borrowing from foreigners. From an accounting point of view, any reduction in the deficit -- provided it does not come out of government investment -- is a reduction in government dissaving and, therefore, an increase in national saving. Although some analysts are concerned that private saving will decline 3 {page 19} as government dissaving drops, the offset is not likely to be very large. Studies indicate that reducing the deficit by one dollar might reduce private saving by 20 cents to 40 cents, which implies that national saving will increase by 60 cents to 80 cents for every dollar of deficit reduction.1 More net investment and lower borrowing from foreigners, both of which would result from increased national saving, will eventually permit a higher standard of living. Deficit reduction will also promote long-term economic growth by providing a more stable environment for financial markets. Participants in the bond, stock, and foreign exchange markets carefully track the government's demands on credit markets; they react adversely to news that reflects a continuing lack of fiscal discipline. As deficits fall and the pool of funds available for loans to the private sector grows, inflation-adjusted interest rates should drop. This outcome will help to stimulate activity in interest-sensitive sectors, such as construction and business investment. Lower interest rates will also help to make the dollar 1. See Lawrence H. Summers, "Issues in National Saving Policy," in Gerald F. Adams and Susan M. Wachter, eds., Savings and Capital Formation (Lexington, Mass .: Lexington Books, D.C. Heath & Co., 1986), pp. 65-88; and Michael J. Boskin, "Alternative Measures of Government Deficits and Debt and Their Impact on Economic Activity," in K. J. Arrow and M. J. Boskin, eds., Economics of Public Debt (New York: Macmillan, 1988), pp. 72-112. 4 {page 20} more competitive. A more competitive dollar boosts exports and makes domestic products more competitive with imports. Because government borrowing reduces investment and slows growth, it is also likely to impose a burden on future generations. In many people's minds, this is the single most important reason to reduce the federal deficit. This burden is in part reflected in the interest costs of servicing the federal debt. As you well know, these costs have risen already from the 6 percent to 8 percent of tax revenues that persisted through the 1960s and 1970s to 18.6 percent of taxes in 1991. Once the effects of recession and deposit insurance are removed, interest costs are now about equal to the deficit. The only way to reduce these costs is to eliminate further federal borrowing. Unless there is further legislation to reduce the deficit, the problem of excessive government borrowing is not going to resolve itself. For a few years, it will look as if things are getting better: the federal deficit could fall from around 6 percent of gross domestic product (GDP) in the early 1990s to around 4 percent in the early years of the next century (see Table 1). But this apparent improvement is entirely the result of the rebound from the current recession and the swing in the deposit insurance accounts. Together, these two temporary factors account for about half of the deficit in the early 1990s. 5 {page 21} (see docx transcript for table) {page 22} The more revealing calculation excludes these two factors and shows the deficit rising from around 3 percent of GDP in the early 1990s to 4 percent in 2002. This increase will take place even with the substantial policy changes that will be necessary to meet the targets of the Budget Enforcement Act (BEA). The deteriorating outlook in large part stems from growth in health care programs, which have proven to be extremely difficult to control. By 2002, the ratio of debt to GDP will have risen to nearly 60 percent -- over twice the average level that prevailed during the 1970s. Shortcomings of a Balanced Budget Rule Over the course of the past two decades, a number of procedural steps have been taken in an effort to rationalize budget policy and control the deficit. These measures include the Congressional Budget and Impoundment Control Act of 1974, the Balanced Budget Act (Gramm-Rudman-Hollings legislation) of 1985 and 1987, and the Budget Enforcement Act of 1990. While they have heightened the attention paid to budget decisions, they have not reduced the deficit to acceptable proportions. The balanced budget amendments that are under consideration are another attempt to set up a procedure that will make the deficit even more 6 {page 23} central to Congressional budgetary decisions; indeed, such an amendment will make eliminating the deficit the single most important consideration of budgetary policy. Proponents hope that by enshrining a balanced budget in the Constitution, they will raise the stakes and force the hard decisions about spending cuts and tax increases that have not yet been made. Before taking such a radical step, it is worth considering the following questions: o What is to be included in the budget to be balanced? o How can the rule be designed to give sufficient flexibility for dealing with recessions and other shocks? o Will the rule mandate undesirable instability in programs and taxes? o What kind of incentives will policymakers face when evaluating programs? o Will the amendment be honored or evaded? and o Does state experience provide any support for a federal balanced budget amendment? What Should Be Included? There is no consensus about what should be included in the budget to be balanced, and how conformity with a balanced budget rule is to be measured. Should the federal government be permitted to borrow to finance capital spending -- perhaps at the cost of imposing less budgetary discipline on this spending? Should transactions that embody commitments to future costs and benefits be recognized only insofar as they 7 {page 24} affect cash flows, or should the accrual of future liabilities and benefits also be recognized? How should the balanced budget rules treat Social Security and other trust funds? These questions are largely left unresolved in the amendments currently proposed. Is There Enough Flexibility? Another issue that arises is whether the amendments provide sufficient flexibility to allow for responses to shocks, such as recessions or natural disasters. The amendments generally provide a measure of flexibility in that the balanced budget rule can be temporarily waived by a supermajority. However, this measure may not be enough, and the Congress should consider whether more flexibility should be provided. A balanced budget amendment risks interfering with the ability of the federal government to stabilize the economy. Economists are less convinced than they used to be that even the federal government should undertake discretionary countercyclical fiscal policy. They hold these reservations because recessions are often not easily recognized in their early stages, while explicit actions to stimulate the economy take too long to plan and carry out and, once established, are hard to get rid of as the economy recovers. Thus, fiscal stimulus often starts too late and continues too long. 8 {page 25} {paragraph selected} Few economists object, however, to the automatic stabilizing that goes on when a recession temporarily lowers revenues and increases spending on unemployment insurance benefits and welfare programs. This automatic stabilizing occurs quickly and is self-limiting -- it goes away as the economy recovers -- but it temporarily increases the deficit. It is an important factor that dampens the amplitude of our economic cycles. {end selection} Some proposed amendments provide limited flexibility through a super- majority vote to suspend balanced budget rules during recessions or in other emergencies. But this means stabilizers could not operate automatically, since it would be necessary for the Congress to recognize and act on the problem. One way to increase the flexibility of a balanced budget rule would be to lengthen the period over which compliance is gauged. For example, one might call for a balanced budget over two-year budget periods -- this measure would fit in well with suggestions that budget policies should not be reconsidered every year. Alternatively, the budget might be balanced over a moving five-year period, including the two immediately preceding years, the current budget year, and the two next budget years. This approach would allow for temporary deviations from a balanced budget, provided that they are made up later. 9 {page 26} Will It Cause Frequent Policy Reversals? Even with increased flexibility, however, a balanced budget rule would be likely to require much more frequent policy changes than currently occur, just to meet the balanced budget rule. This instability in policy could harm the economy if it leads to frequent changes in tax rates; it could also harm the goals of government programs if it leads to unstable funding. The economic harm from frequent tax rate changes occurs because people cannot adjust their behavior to reflect the effects of taxes on incentives to work and invest if those taxes are continually changing. The harm from this instability is sufficiently large that most economists would agree that it is better to allow temporary deviations from a balanced budget than to achieve continuous balance through frequent changes in taxes.2 Under a balanced budget rule, the only other option is to meet the rule through variations in government spending programs. That, too, could cause harm by increasing the level of uncertainty attached to entitlement programs and procurement contracts. Government agencies would have to shorten their planning cycles. Government contractors would demand higher prices to do work for the government knowing that it could be terminated abruptly. People receiving government benefits might lose those benefits during hard 2. See Robert J. Barro, "On the Determination of the Public Debt," Journal of Political Economy, no. 87 (October 1979), pp. 940-971. 10 {page 27} economic times, precisely when such support is most needed. Such uncertainty would not provide a reliable backdrop for economic activity. Will Policies Be Distorted? In addition to forcing frequent policy changes, a balanced budget rule could set up perverse incentives for policy decisions. According to some analysts, the overriding concern over deficits has already led to a paralysis in policy: they claim that it contributed to the delay in funding the resolution of the savings and loan crisis, and deepened the problem as a result. The concern over current deficits may also have delayed consideration of long-term reform of the nation's health care system, even though one goal of reform could be to cut budgetary costs in the long run. A balanced budget rule could make it even harder to conduct discussions of policies on their own merits, and could lead to distortions of policies simply to meet budget goals. For example, accounting rules could be changed for some government programs, such as shifting to accrual instead of cash accounting (or vice versa). There are frequently good arguments for changes in accounting rules, including those that led to the recent reform in accounting for credit programs. It would be a pity to have these arguments displaced by the need to meet current budget targets. Similarly, burdens might be shifted to state and local governments (through unfunded mandates) or to the private sector (through regulation or trade policy) even when the public good would 11 {page 28} be enhanced by keeping the programs at the federal level. And spending cuts that would result in immediate savings most likely would be made first, without much consideration of the long-run merits of the programs. Major deficit reduction surely entails spending cuts, but the reductions should be based on the long-run effectiveness of the benefits provided, not on meeting a rigid annual dollar target. Will the Budget Rule Be Honored or Evaded? Probably the most important difficulty with a balanced budget rule is that it offers many opportunities for avoidance or evasion. The President and the Congress could get around an apparently rigid balanced budget rule primarily in three ways. The first involves using timing mechanisms and other budget gimmicks to achieve short-run budget targets, including such actions as shifting pay dates between fiscal years, accelerating or delaying tax collections, delaying needed spending until future fiscal years, and selling government assets. The second way to evade the balanced budget constraint might be to base the budget on overly optimistic economic and technical assumptions. It was a major step forward in the 1990 Budget Enforcement Act to remove these incentives, which would be reinstated by a balanced budget amendment. In fact, Section 1 of H. J. Resolution 290 seems to be an invitation to such gimmicks, since requiring the President and the Congress to adopt legislation 12 {page 29} estimating total receipts does not guarantee that the estimate will be realistic. Forecasters would agree that it is already difficult enough to estimate outlays and revenues accurately. The forecasting record around turning points in the economy is not encouraging (see Table 2, especially years 1982, 1983, and 1990). Third, the President and Congress could seek to create off-budget agencies that would have authority to borrow and spend but whose transactions would not be directly recorded in the budget. Sometimes exclusion of certain types of spending can improve budgetary control procedures: for example, CBO supports the decision not to include the spending of the Resolution Trust Corporation under the caps in the Budget Enforcement Act rules. But off-budget agencies could be misused to take some spending off- budget simply to avoid having to make large cuts to meet a balanced budget rule. Such a transparent evasion of the constitutional amendment would undoubtedly be challenged in the courts, which would leave to the judiciary part of the task of setting procedures to control the budget. These methods and others have been used to circumvent the annual deficit targets required since the Balanced Budget Act of 1985 (Gramm- Rudman-Hollings) was passed. The balanced budget rule could fall prey to the same sorts of maneuvers. 13 {page 30} (see docx transcript for table) {page 31} Does State Experience Provide Any Support? Despite all of these short- comings, many proponents argue that the federal government should (and can) balance its budget because the states are required to do so. But there are many differences between state governments and the national government that make comparisons between the two levels difficult to sustain. States have frequently taken actions to evade their own balanced budget requirements. Moreover, financial markets impose constraints on the fiscal policy of state governments that operate independently of, and reinforce, constitutional or statutory limitations. The differences between federal and state governments have partly to do with responsibilities and partly to do with the distribution of political power. The federal government assumes some major responsibilities not assumed by state governments, including providing for national defense, maintaining the stability of the national economy, and providing disaster assistance. These responsibilities periodically may require intentional budget deficits. Further, state governors often exercise much more power over state budgets than do state legislatures (including the ability to use the line-item veto and to impound funds), in contrast to the relatively equal division of fiscal responsibilities between the President and the Congress. 14 {page 32} The fiscal structure of states also differs from that of the federal government, and this has relevance for the budget that is to be balanced. Balanced budget requirements of states normally apply only to operating budgets, with capital budgets and employee pension funds excluded from consideration. In contrast, the amendments under consideration would require the total federal budget to be balanced, which includes investment (capital) activities, pension funds, as well as operating expenditures. In many cases, the state balanced budget rules, which vary substantially from state to state, offer broad scope for evasion. Many more states require the Governor to submit a balanced budget to the state legislature than require the legislature or the Governor to approve a balanced budget. In addition, requirements imposed during the preparation of state budgets do not force them to be balanced in reality. The Fiscal Survey of the States, recently released by the National Association of State Budget Officers, indicates that three-fourths of the states spent more money than they took in during fiscal year 1991. States have been known to use mechanisms such as shifting revenues and expenditures between fiscal years, engaging in short-term borrowing, and creating quasi-governmental entities (off-budget agencies) to get around fiscal strictures. This problem, coupled with the dissimilarities between the national and state governments, calls into question the appropriateness of arguing for a balanced budget based on state experience. 15 {page 33} Despite all of these problems, state operating budgets are balanced over the long term: no state can continue to borrow to meet current expenditures year in and year out. But this long-run balance may be imposed more by market pressures than by any legal or constitutional requirement. Because they borrow money to finance capital construction, most states must operate under constraints imposed by financial markets. States viewed as fiscally irresponsible are forced to pay higher interest rates on borrowed funds because of a higher probability of default. The federal government does not face such financial constraints. A few economists, however, are concerned that if the budget were to remain grossly out of balance for a very long period, debt could accumulate to such an extent that financial markets would begin to demand a premium for holding U.S. Government debt, just as they do now for states that have excessive debt. Concurrent Actions Are Needed to Achieve Fiscal Discipline If a balanced budget amendment is approved and sent to the states for ratification, the Congress would be obligated to begin immediately to take the steps necessary to comply with a balanced budget regime. Two major tasks would have to be accomplished: the deficit would have to be brought down substantially during the interim period; and the procedural detail of the 16 {page 34} amendment -- its scope and how it would be carried out -- would need to be established. Bringing Down the Deficit. The first task would be to bring the deficit down to the point at which enforcing a balanced budget would not require sudden, draconian cuts in spending or massive, abrupt tax increases. Although this task is by no means easy -- it is the problem that has bedeviled the budget process for the past decade -- it is critical. If the amendment takes effect with the deficit still in the hundreds of billions of dollars, the Congress would be faced with the Hobson's choice of enforcing the new rule and inducing a deep recession or waiving the rule from the start, which would clearly be an inauspicious beginning for the new era. Should no progress be made during the transition, bond markets are likely to react negatively, making the economy falter and the deficit grow. It would be preferable for the President and the Congress to reach a consensus concerning the appropriate mix of policy changes necessary to achieve the goal of budgetary balance well before the effective date of the amendment. If such a consensus were not reached, however, transition legislation would need to specify methods to force a reduction in the deficit in a more automatic and mechanized way. Two different broad paths could be taken -- granting power to the President to carry out budgetary changes 17 {page 35} without the specific action of the Congress, or resorting to formulas to effect automatic reductions if an agreement on alternatives were not reached. One option for the transition period, then, is to require by law that the President put forward a proposal that balances the budget by the end of a specific time period -- for example, five years. To guarantee that such a plan is not mischievous or based on unattainable economic assumptions, the proposal would be automatically implemented unless the Congress were to pass substitute legislation that meets the same goal. (The Congress may give the executive branch this power if it is accompanied by instructions that are clear enough that a court could determine whether the executive branch had obeyed the will of the Congress). Someone would unmistakably be in charge of the nation's fiscal affairs if the President were temporarily given such extraordinary powers. However, such a reallocation of budgetary power, even on a temporary basis, would be unprecedented and -- to many -- unacceptable. An alternative set of procedural options would draw on and strengthen the current provisions of the Budget Enforcement Act. For example, one-third (or some other specified proportion) of the needed budgetary savings could be allocated to discretionary programs and the remainder to entitlements or taxes as defined under current pay-as-you-go procedures. The President would then be 18 {page 36} required to make proposals for deficit reduction that conform to these allocations. Should the Congress fail to pass the discretionary proposals, or a plan with savings of equivalent value, all discretionary appropriations would be reduced pro rata to attain the targets. Should pay-as-you-go legislation fail to attain the mandated savings, the gap could be filled automatically by raising all tax rates and scaling back all benefits in proportions to be specified by the legislation. If, despite these rules, deficit saving targets were not attained in any year (say because of an incorrect estimate of the spending or revenue consequences of legislation), the shortfall could be allocated to the deficit reduction required in the following year. These measures would retain greater Congressional control over budget outcomes and, unlike present BEA rules, they would spread the burden of deficit reduction broadly. Most analysts would not favor as a permanent diet these rigid specifications of the budget process for the transition period. The fail-safe procedures are too mechanical, and they would throw to the winds both countercyclical fiscal policy and the automatic economic stabilizers. But just such rigidity may be necessary to have a chance of making a successful transition to a new regimen of constitutionally mandated balanced budgets. Without a consensus on national goals -- or the more drastic measures just discussed -- a balanced budget amendment is doomed to failure. 19 {page 37} Defining the Scope of and Carrying Out the Amendment. None of the amendments is self-enforcing, and the Congress will have to set systems in place to make the amendment work. Doing so could potentially involve resolving many issues, including process, definition, and penalties. In fact, such issues will be critical even before the amendment takes effect so as to guarantee deficit reduction. The resolution of these issues by the Congress would minimize the likelihood that the amendment would become the subject of interpretation by the courts. The procedural concerns these amendments raise are evident if we take H. J. Resolution 290 as an example. Its first section requires enacting a law in which the Congress and the President agree on an estimate of total receipts for the upcoming fiscal year. However, what happens if there is a stalemate and the fiscal year begins? Some process that performs the same functions as the continuing resolution would have to be developed. H. J. Resolution 290 raises questions of definition in its second section where it calls for a supermajority vote to raise "the limit on the ... debt held by the public." This debt limit is quite different from the one now voted on by the Congress in that it excludes borrowing from trust funds. There is much to be said for this change, but it is not universally agreed upon. Also, Sections 1, 3, and 6 refer to total receipts, but Section 4 refers to revenue bills, which 20 {page 38} are not the only types of legislation governing receipts. Even though the terms are sometimes used interchangeably, the precise meaning intended should be clarified. Some work will be necessary to resolve these and other definitional disputes created by a balanced budget amendment. In order for budget targets to be hit exactly, without any failure, new kinds of controls will have to be put in place. For example, H. J. Resolution 290 mandates that "total outlays" (not estimated outlays) be no larger than estimated receipts. The current system sets controls over the authority to obligate, not over total outlays. Setting additional controls over actual outlays would require a cumbersome new control system that would be extremely difficult to carry out in practice. It would be preferable to enact some sort of "look-back" provision that required any shortfall resulting from a variance between the estimates and actual experience to be made up in the following year. Dangers of Subverting the Amendment. No enforcement procedure is foolproof. The amendment could be nullified by precisely the evasions that have in recent years undermined the credibility of the Congress and government. For this reason, in addition to enacting a plan to achieve deficit reduction before the amendment takes effect and procedures for its 21 {page 39} implementation, the Congress should be vigilant in opposing actions that would circumvent the goals of the amendment. It is important, therefore, that the potential for evading the balanced budget rule or enacting inappropriate policies in response to it be recognized explicitly; that the Congress take actions to ensure that the definition of the budget to be balanced does not become fluid; and that burdens are not passed on unduly to others in society as a result of such an amendment. It is not a step forward to pass an amendment, then avoid it through gimmickry or by inappropriately passing on responsibilities to someone else. CONCLUSION A balanced budget amendment, in and of itself, is not a solution. Rather it is only a repetition -- in an even louder voice -- of an intention that has been stated over and over again during the course of the last 50 years. Nearly 20 years ago, we were content to make our balanced budget promises in the budget resolutions and the President's budget proposals. Then we passed laws requiring lower deficits (Gramm-Rudman-Hollings in 1985 and 1987, and the Budget Enforcement Act in 1990). Now we want to put the promise in the Constitution. 22 {page 40} We should ask, however, whether a constitutional amendment will do anything to alter the structure of our current system. How will it change the system that now keeps our political leaders and our institutions from adopting the fiscal stance that the vast majority of the public and the preponderance of our policymakers agree is in the country's long-run interest? It cannot do the job alone. Without credible legislation for the transition that embodies an effective mechanism for enforcement, government borrowing is not going to be cut. But the transitional legislation and the enforcement mechanism are 95 percent of the battle. If we could get agreement on those, we would not need a constitutional amendment. In this election year, it would be a cruel hoax to suggest to the American public that one more procedural promise in the form of a constitutional amendment is going to get the job done. The deficit cannot be brought down without making painful decisions to cut specific programs and raise particular taxes. The legislative and executive branches can and should work together to achieve some agreement on how the deficit should be reduced, as they did in 1990. A balanced budget amendment, in and of itself, will neither produce a plan nor allocate responsibility for producing one. Even if it is passed, therefore, the hard work will remain to be done. 23 {page 41} April 22, 1992 TO: Senator Dole FROM: Kathy Ormiston SUBJECT: Balanced Budget Amendments The major Republican objection to Senator Simon's Balanced Budget Amendment (S.J. Res. 18) is that it does not contain a requirement for a three-fifths vote to raise taxes. Senators Thurmond, Hatch, Simpson, Grassley, Specter, Lugar, Lott, and Wallop agreed to cosponsor the bill without the tax control provision, because Senator Simon refuses to support a bill that includes it. You are a cosponsor of the Kasten Balanced Budget Amendment that bars receipts from growing faster than the rate of increase for Gross National Income without a three-fifths vote. History Senator Simon tried to bring the resolution to the floor by amending another bill earlier this year. Senator Mitchell talked him out of this effort by promising to bring the Resolution up as a free standing bill by June 1. Senator Mitchell now says he only promised to "try" to bring the resolution up by June 1. The Stenholm bill was voted on in the House on July 17, 1990. It fell 7 votes short of the 287 votes (two-thirds vote) needed to pass. Representatives Glickman and Slattery voted against the Resolution. Constitutional Amendments must be ratified by three-fourths of state legislatures within seven years. Major Provisions Simon's S.J Res. 18 * Outlays can not exceed receipts without a three-fifths roll call vote of each House. * President must submit a balanced budget. * Waiver for declaration of war or imminent military threat. Major Provisions Stenholm's H.J. Res. 290 (Craig Bill in Senate) * Outlays can not exceed receipts except by a three-fifths roll call vote of each House. * Like Simon, does not require a super-majority to raise taxes . * President must submit a balanced budget. * Waived in case of war, but not for imminent military threat (Heflin's language) . * Stenholm's Amendment would require that Congress and the President agree on an estimate of total receipts through the enactment of a joint resolution devoted solely to that subject. * Public debt can not be increased without a three-fifths vote. {page 42} A18 REVIEW & OUTLOOK Simon's Tax Increase {handwritten: Kathy} Faster than you can say "House Bank scandal," Congress is suddenly enamored of a constitutional amendment to balance the federal budget. We know what you're thinking, and yes, it's too good to be true. The House Budget Committee, heretofore uninterested in the amendment, plans to hold hearings. House Speaker Tom Foley predicts the amendment will pass this year, despite his personal opposition. Texas Democrat Charles Stenholm's amendment bill has 268 co-sponsors, including 110 Democrats. In the Senate, Democrat Paul Simon of Illinois declares, "I think we have a real chance of passing it." The last time the Senate even allowed a vote on the amendment was 1986, the year before George Mitchell's liberal Democratic faction took over. We suppose it's healthy that the Members are feeling enough political pressure to do something, anything, about a runaway federal budget. Yet this Beltway groundswell has all the sincerity of a trial lawyers' convention. Mr. Simon, who ran for President as the only true New Deal heir in 1988, wants us to believe he's worried about federal spending. Mr. Simon's political camouflage would allow Members to tell angry voters that they're really champions of fiscal probity because they support a "balanced budget." Yet it contains no restraint on the real problem, which is spending and taxes. The Simon propaganda on the bill stresses "the deficit," never spending. He frets about "staggering deficits year after year," and "sending the bill to our grandchildren," but he can't find anything but defense spending to actually cut. Mr. Stenholm has a much better personal record on spending, but his amendment also lacks a tax-and-spend limitation. The Simon-Stenholm approach would in effect create an automatic tax-increase mechanism. Every time the budget would go into deficit, Congress and the President would have to close the gap. The choices would be lower spending or higher taxes. But spending cuts never pass because the Members are in political hock to active, vociferous lobbies (such as public-employee unions ). Higher taxes may be unpopular, but a balanced-budget amendment would create a political "necessity" that makes it easier for politicians to justify more new taxes. This has more or less been the experience in states that have balanced-budget laws. Just ask California's Republican Governor Pete Wilson, who had "no choice" but to sign a record tax hike in 1991. By contrast, Republican Senator Robert Kasten of Wisconsin is offering a balanced-budget amendment that has real teeth. It'd require a three- fifths supermajority in Congress to deficit-spend. But it also requires a three-fifths vote to increase taxes above the rate of economic growth. In short, if voters had to tighten their belts in a recession, so would the federal government. The Kasten amendment is supported by the various groups that care about the size of government, such as the American Farm Bureau Federation. President Bush has said that any balanced-budget amendment "should include safeguards against a resort to higher taxes," presumably of the Kasten sort. Because it's for real, Mr. Kasten's bill has only 16 Senate co-sponsors. Mr. Foley may not let a similar bill even get a vote in the House. As we've argued here for nearly two decades, the deficit boom began with the Budget Act "reform" of 1974. Passed over a Watergate-weakened President, that bill stripped the executive of the impoundment power and made Congress's 535 logrollers the dominant budget force. This is obvious from the cynical way Congress is now lobotomizing the $7.9 billion in spending "rescissions" (cuts) that President Bush has proposed. Speaker Foley's Democrats have stripped them back to $5.7 billion, and replaced many of Mr. Bush's proposals with their own cuts, which punish Members who've had the temerity to support rescissions. Republican Harris Fawell of Illinois has seen funding for the renowned Fermi National Laboratory in his district gutted. The status quo Congress punishes its heretics. The solution is to make someone besides the logrollers accountable again. Our belief has been that the best way to do this is to put the President back into the process with a line-item veto. Maybe President Bush should propose a deal: He'll sign a phony balanced-budget amendment if Congress will pass a real item veto.