Testimony Before the House Judiciary Committee
Jude Wanniski
August 4, 1982

 

H.J. Res. 350
A Balanced Budget Amendment

From the dawn of civilization, when people first began to arrange themselves in political entities, the central problem has been that of public finance. How do you get resources from people who have them to people who you want to have them? Do you do it with taxation or with bonds? Do you take it or borrow it?

The problem is always easiest to solve when the economy is growing and the tax base is expanding. In 19th century England, following the Napoleonic Wars, the problem of how to balance the budget lay in deciding which taxes to reduce or eliminate: The economy was expanding so rapidly that unwanted surpluses filled the Treasury year after year. In the United States prior to the Civil War, revenues from the sale of public lands were so great that it was considered fortunate there was a national debt which could be retired, otherwise the government would be forced to acquire private financial assets.

For most of history, though, governments have struggled to make ends meet. For most of early history, when family units could produce only small surpluses above their basic requirements, it was futile for political leadership to levy taxes greater than 10 percent or so. Budgets were then balanced by borrowing or plundering. And in periods of economic decline, as in Rome AD 200 onward, governments that became too weak to finance expeditions of plunder and had taxed their people to the limits, could only make ends meet by devaluing the currency. That is, it could alter the legal value of bonds held by its creditors so that a lesser tax on the people could redeem the bonds. In recent years, Presidents Johnson, Nixon, Ford, Carter and Reagan have built similar inflation assumptions into their budget strategies.

I personally do not believe a balanced budget is necessarily an ideal condition in public finance. Certainly I do not think it is necessary. We could run a federal deficit for the next thousand years, year after year, with no adverse effects as long as the national debt did not rise in proportion to national output. The growth of public debt might as easily reflect growing wealth as it would economic decline. Our trillion dollar national debt would not seem nearly so burdensome if the economy were growing faster than publicly held national debt. In 1972 dollars, the gross federal debt is about $543 billion in fiscal 1982 compared to $447 billion in fiscal 1952; it is up 21 percent in 30 years. But population is up 46 percent in that same period, so real debt per person is down.

If a balanced budget were a necessary or ideal condition, on the other hand, it could not be ordered by the Constitution any more than the Constitution could require Peace or Prosperity. We all recognize that the deficits we are now experiencing are not a reflection of growing national wealth but of economic decline, and that the nation would be in healthier condition if the deficits were seen as declining rather than expanding. But how do we accomplish this?

Do we raise tax rates to increase revenues, but in so doing cause an economic decline that further shrinks the tax base as demands for social spending climb? Or do we lower tax rates in the expectation that these will invite economic expansion, a growing tax base, declining unemployment and welfare outlays, and narrower deficits?

At the same time we must decide on how monetary policy will affect the budget. Do we want more currency devaluations in other words, more inflation in order to reduce the real burden of the national debt and at the same time raise taxes by inflating taxpayers into higher tax brackets? Will this balance the budget? Or will it cause savings and investment to decline as people lose confidence in the currency. And will "bracket creep" cause people to move into the underground economy, cheat on taxes, and in other ways shrink the tax base?

If inflation isn't the answer, how about deflation? Why not a monetary policy that causes the dollar to grow in value relative to real goods. This will increase the burden of the national debt and force down wages and profits, putting everyone into lower tax brackets. Does this spur savings and investment and pull people out of the underground economy?

Or is yet another monetary policy the one required to expand the economy and tax base in a way that will bring about the mandated balanced budget? Must the government abandon both inflation and deflation as instruments of economic policy and once again stabilize the general price level through a gold proxy as the likeliest monetary policy to underpin a balanced budget requirement?

We observe this is exactly the debate we are experiencing now among the many theoretical schools of thought. We have liberal Keynesians, commercial Keynesians, old-fashioned fiscal conservatives, monetarists, and classical supply-siders, all setting forth combinations of monetary and fiscal policies they believe will reduce the federal deficits.

What is more, while we can be sure that one set of prescriptions is superior to the others in meeting the economic problems of the moment, it is not certain that the superior prescription would be superior next year, the next decade, or at all times in the next century. There will be times when increased spending will enhance prospects of a balanced budget and times when the opposite is true. There are times when spending cuts tend to balance the budget and times when the opposite occurs. There is no set of prescriptions that fit all economies at all times, or certainly those prescriptions would have been discovered many centuries ago, if not thousands of years ago.

The drive now for a Constitutional amendment to balance the budget comes from the Old Guard among conservative economists. They are supported by the monetarists, who are waiting in the wings with a Constitutional amendment requiring a steady increase in the money supply. The combined effect would be to make illegal the practice of Keynesian or supply-side economics in this country. The Old Guard fiscal conservatives and their monetarist allies, who are in decline as theoreticians, can only hope to survive by enshrining their theories in the Constitution through political intervention.

The House Judiciary Committee should recognize this appeal for a Constitutional amendment as an outgrowth of an intramural squabble among economists. The Committee should reject this appeal for a political solution and spare the nation the expense of having to seriously consider the proposal at a time when our resources should be devoted to solving the problems that have created this deep recession and these unfortunate deficits.