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85–491 PDF 2003

BALANCED BUDGET AMENDMENT

HEARING

BEFORE THE

SUBCOMMITTEE ON THE CONSTITUTION

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

ON

H.J. Res. 22

MARCH 6, 2003

Serial No. 1

Printed for the use of the Committee on the Judiciary

(

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

(II)

COMMITTEE ON THE JUDICIARY 

F. JAMES SENSENBRENNER, JR., Wisconsin, Chairman 

HENRY J. HYDE, Illinois 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

WILLIAM L. JENKINS, Tennessee 

CHRIS CANNON, Utah 

SPENCER BACHUS, Alabama 

JOHN N. HOSTETTLER, Indiana 

MARK GREEN, Wisconsin 

RIC KELLER, Florida 

MELISSA A. HART, Pennsylvania 

JEFF FLAKE, Arizona 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

JOHN R. CARTER, Texas 

TOM FEENEY, Florida 

MARSHA BLACKBURN, Tennessee 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California

PHILIP G. KIKO, Chief of Staff-General Counsel 

PERRY H. APELBAUM, Minority Chief Counsel 

SUBCOMMITTEE ON THE CONSTITUTION

STEVE CHABOT, Ohio, Chairman

STEVE KING, Iowa 

WILLIAM L. JENKINS, Tennessee 

SPENCER BACHUS, Alabama 

JOHN N. HOSTETTLER, Indiana 

MELISSA A. HART, Pennsylvania 

TOM FEENEY, Florida 

J. RANDY FORBES, Virginia 

JERROLD NADLER, New York 

JOHN CONYERS, JR., Michigan 

ROBERT C. SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ADAM B. SCHIFF, California

CRYSTAL M. ROBERTS, Chief Counsel 

PAUL B. TAYLOR, Counsel 

KRISTEN SCHULTZ, Full Committee Counsel 

DAVID LACHMANN, Minority Professional Staff Member 

(III)

C O N T E N T S 

MARCH 6, 2003

OPENING STATEMENT 

Page 

The Honorable Steve Chabot, a Representative in Congress From the State 

of Ohio, and Chairman, Subcommittee on the Constitution ............................ 1

The Honorable Robert C. Scott, a Representative in Congress From the State 

of Virginia ............................................................................................................. 3

The Honorable Jerrold Nadler, a Representative in Congress From the State 

of New York, and Ranking Member, Subcommittee on the Constitution ....... 3

The Honorable Ernest J. Istook, Jr., a Representative in Congress From 

the State of Oklahoma ......................................................................................... 73

WITNESSES 

John Berthoud, Ph.D., President, National Taxpayers Union, National Taxpayers Union Foundation 

Oral Testimony ..................................................................................................... 6

Prepared Statement ............................................................................................. 8

Kent Smetters, Ph.D., Assistant Professor, The Wharton School 

Oral Testimony ..................................................................................................... 11

Prepared Statement ............................................................................................. 13

Mr. Richard Kogan, Senior Fellow, Center on Budget and Policy Priorities 

Oral Testimony ..................................................................................................... 21

Prepared Statement ............................................................................................. 23

Mr. William M. Beach, Director, Center for Data Analysis, John M. Olin 

Senior Fellow in Economics, The Heritage Foundation 

Oral Testimony ..................................................................................................... 55

Prepared Statement ............................................................................................. 56

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Prepared Statement of the Honorable Steve Chabot, a Representative in 

Congress From the State of Ohio, and Chairman, Subcommittee on the 

Constitution .......................................................................................................... 2

(1)

BALANCED BUDGET AMENDMENT 

THURSDAY, MARCH 6, 2003

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON THE CONSTITUTION, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC.

The Subcommittee met, pursuant to call, at 12:06 p.m., in Room 

2226, Rayburn House Office Building, Hon. Steve Chabot, Chairman of the Subcommittee, presiding. 

Mr. CHABOT. The Subcommittee will come to order. This is the 

Subcommittee on the Constitution. I’m Steve Chabot, the Chairman. 

This afternoon, the Subcommittee on the Constitution convenes 

to hear testimony concerning the Balanced Budget Amendment. 

The major impetus for balancing the Federal budget is the impact 

of the Federal debt and interest payments on future generations of 

Americans. The Federal budget deficit has become one of the most 

persistent political issues in recent years. Since the 1930’s, dozens 

of proposals have called for laws or constitutional amendments that 

would limit the growth of the Federal budget or of the public debt. 

Legislative efforts to adopt a balanced budget have largely proven unsuccessful in eliminating deficit spending. Congress has repeatedly relaxed the deficit targets in the Balanced Bbudget and 

Emergency Deficit Control Act of 1985, Gramm-Rudman-Hollings 

Act, and new budget control mechanisms have not offered a realistic long-term prospect of continued deficit reduction. Only a constitutional amendment will fully ensure a balanced budget. 

Congress balanced the budget in 1997 for the first time in 30 

years. Since then over $453 billion in debt has been retired. However, $233 billion has been added due to post September 11 security spending and a softening economy. Congress continued—Congress cannot continue to run up such deficits each year. A balanced 

budget amendment is needed to hold Congress accountable for its 

management of public funds and prevent any future congresses 

from engaging in deficit spending. 

The President’s fiscal year 2004 budget includes $352.3 billion 

for interest payments on the outstanding debt. That figure will rise 

as long as we continue to have deficits. The cost of financing the 

debt we’ve already accrued would cover the bulk of the cost for the 

war on terror which the President’s budget estimates at $392.7 billion. If the budget were balanced we would be in a much better position to deal with large, necessary expenditures that occur outside 

the normal budget process. 

2

Furthermore, a balanced budget amendment is needed to protect 

Social Security, Medicare, and other priorities important to America’s children and seniors. Interest payments are the second largest 

single item of Federal spending following Social Security. Controlling the debt will provide Government with the cash to ensure the 

prosperity of future generations and safeguard funds designated for 

seniors and their existing medical needs. 

Public opinion surveys consistently show that 70 to 80 percent of 

the population support passing a balanced budget amendment to 

the Constitution. Balancing the budget has made it possible for 

Congress to pass tax cuts, including the largest tax cut in recent 

history. Tax cuts have spurred economic growth, helping millions 

of American families. Since 1996 nearly 9.7 million jobs have been 

created, and nonresidential investment has increased 34.6 percent. 

A typical family has saved $672 or more in interest expenses every 

year because balanced budgets have reduced inflation pressure and 

interest costs. 

In conclusion, a balanced budget amendment is necessary to 

eliminate Federal deficits and restore the economic health of our 

Nation. The benefits of the amendment are clear. Once Congress 

eliminates deficits, funds will be available for private investment, 

resulting in lower inflation, reduced interest rates and increased 

productivity and overall economic growth. With this in mind I look 

forward to hearing from our witnesses today. 

[The prepared statement of Mr. Chabot follows:]

PREPARED STATEMENT OF THE HONORABLE STEVE CHABOT, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF OHO

This morning the Subcommittee on the Constitution convenes to hear testimony 

concerning the Balanced Budget Amendment. The major impetus for balancing the 

federal budget is the impact of the Federal debt and interest payments on future 

generations of Americans. The Federal budget deficit has become one of the most 

persistent political issues in recent years. Since the 1930s, dozens of proposals have 

called for laws or constitutional amendments that would limit the growth of the federal budget or of the public debt. 

Legislative efforts to adopt a balanced budget have largely proven unsuccessful 

in limiting deficit spending. Congress has repeatedly relaxed deficit targets in the 

Balanced Budget and Emergency Deficit Control Act of 1985 (Gramm-Rudman-Hollings Act) and new budget control mechanisms have not offered a realistic long-term 

prospect of continued deficit reduction. Only a Constitutional amendment will fully 

ensure a balanced budget. 

Congress balanced the budget in 1997, for the first time in 30 years. Since then, 

over $453 billion in debt has been retired. However, $232 billion has been added 

due to post-September 11th security spending and a softening economy. Congress 

cannot continue to run up such deficits each year. A balanced budget amendment 

is needed to hold Congress accountable for its management of public funds and prevent any future Congress from engaging in deficit spending. 

The President’s FY–2004 Budget includes $352.3 billion for interest payments on 

the outstanding debt. That figure will rise as long as we continue to run deficits. 

The cost of financing the debt we’ve already accrued would cover the bulk of the 

cost for the war on terror, which the President’s budget estimates at $392.7 billion. 

If the budget were balanced, we would be in a much better position to deal with 

large, necessary expenditures that occur outside of the normal budget process. 

Furthermore, a balanced budget amendment is needed to protect Social Security, 

Medicare and other priorities important to America’s children and seniors. Interest 

payments are the second largest single item of federal spending following Social Security. Controlling the debt will provide government with the cash to ensure the 

prosperity of future generations and safeguard funds designated for seniors and 

their existing medical needs. 

Public opinion surveys consistently show that 70–80% of the population support 

passing a balanced budget amendment to the Constitution. Balancing the budget 

3

has made it possible for Congress to pass tax cuts, including the largest tax cut in 

recent history. Tax cuts have spurred economic growth, helping millions of American families. Since 1996, nearly 9.7 million jobs have been created, and nonresidential investment has increased 34.6%. A typical family has saved $672 or more in 

interest expenses every year because balanced budgets have reduced inflation pressure and interest costs. 

In conclusion, a balanced budget amendment is necessary to eliminate federal 

deficits and restore the economic health of our nation. The benefits of the amendment are clear—Once Congress eliminates deficits, funds will be available for private investment resulting in lower inflation, reduced interest rates and increased 

productivity and overall economic growth. With this in mind, I look forward to hearing from our witnesses today.

Mr. CHABOT. And at this time I would yield to the gentleman 

from New York, the Ranking Member of the Committee if he would 

like to make an opening statement or if he’d like to defer to Mr. 

Scott for a minute or two here. 

Mr. NADLER. Let Mr. Scott speak for a minute or two, besides I 

want to read the prepared statement. 

Mr. CHABOT. Thank you. We’ll hear from Mr. Scott then. 

Mr. SCOTT. Thank you. Thank you, Mr. Chairman. Mr. Chairman, as we have the witnesses, my question to them, and I hope 

they all deal with it, is not whether or not generically a balanced 

budget is better or worse than a budget in serious deficit, but 

whether or not this constitutional amendment will help things or 

make them worse. We don’t need a balanced budget amendment. 

What we need is a balanced budget. We’re dealing with a budget 

right now that is a result of massive tax cuts that have thrown this 

thing so far out of balance that if you eliminated all of the nondefense, nondiscretionary spending, the on-balance—the on-budget 

part of the—the non-Social Security trust funds, if you eliminated 

all of Government, you still would not be in balance. The nondefense discretionary part of the budget is $425 billion. This thing 

is 460 some million dollars in deficit right now, offset a little bit 

by the Social Security and Medicare trust funds. 

The Chairman has said it is all because of 9/11. Wrong. this 

thing went out of balance, it was out of balance on September 10, 

and we didn’t change. Now, we’ve got an excuse for it to be in deficit. Now, we just keep going and going and going. This budget will 

not balance itself whether we have a balanced budget constitutional amendment now. You have got to take some tough votes and 

wasting time with a constitutional amendment won’t help. We need 

to balance the budget, get serious, and you can’t have all these 

massive tax cuts that the Chairman has bragged about, and expect 

the budget to suddenly come in balance. 

I thank you, Mr. Chairman, for the opportunity to ventilate a little bit. [Laughter.] 

Mr. CHABOT. Thank you. 

Mr. Nadler, did you want to make an opening statement? 

Mr. NADLER. Yes, I do. Thank you, Mr. Chairman. 

Mr. Chairman, the fact that we’re here considering, allegedly 

considering—I mean we know what’s going to happen—this balanced budget constitutional amendment is an exercise of the greatest hypocrisy I have seen in my years in Congress. 

When President Clinton left office the forecast surplus over the 

next 10 years was $5.6 trillion. Based on that, relying on that, 

President Bush and the Republican Party assured us we could do 

4

$11⁄2 trillion in tax cuts. Some Democrats said, well, that $5.6 trillion isn’t firm. It’s fairly—it assumes there will never be a recession, that the boom will go on forever—booms never go on forever—

and certain other assumptions, but we were told, ‘‘You can rely on 

that,’’ and so we passed this huge tax cut. Now we’re being told to 

extend the tax cuts, make them permanent, add additional tax cuts 

such that if we followed the instructions that we are being asked 

at the request of the President and the majority leadership of this 

House. The foregone revenue from these two tax cuts combined will 

be about $4 trillion over a decade, $4 trillion. 

We’ve now gone to where we’re going to have—we’re forecast to have $2.6 trillion in deficits over the next 10 years before we pass 

these tax cuts. And if we pass them, of course that doesn’t count 

the war with Iraq which is expected to cost zero dollars according 

to the current budget estimates. You’re obviously going to have 

huge deficits. 

But the Republicans have recently said that—have said that running deficits are desirable. Treasury Secretary Snow recently said 

debts don’t matter. Tom Delay denounced Alan Greenspan for suggesting that the deficit may be a problem, and that additional tax 

breaks might be bad for the country. Someone—I forget which 

Member of the House was quoted in the New York Times a few 

weeks ago saying, that well, if you had to choose—he used to be 

a deficit hawk, but now he understood better, and if he had to 

choose between big Government with a surplus and small Government with a huge deficit, he’d take the small Government with the 

huge deficit, and that deficits are useful. Tom Delay said this. Deficits are useful for making Government spend less money because 

if you actually debate, you can spend money on education or housing, whatever, you lost the debate. But if you say we’re broke, you 

can forego that spending. 

The same people who are telling us that deficits don’t matter and 

that we want to force a deliberate deficit in order to hold down 

spending, now have the audacity to bring this piece of crap before 

us to amend the Constitution of the United States to forbid what 

they are deliberately doing in order, presumably, to hide from the 

American people that they are in fact deliberately creating very 

large-scale deficits. 

We don’t need a constitutional amendment. President Clinton, 

the Democratic leadership of the House and the Senate back in 

1993, and to a lesser extent the Republican leadership of the House 

and Senate after 1995, showed that if you cut expenditures and you 

don’t cut taxes too much, you can—or you increase taxes as was 

done in 1993, and you have proper stewardship over the economy 

and have decent growth rates, you can balance the budgets. It took 

8 years to undue the damage from the ’81 tax cuts that led us into 

quintuple the national debt during the Reagan and first Bush 

years. We turned that around in the Clinton administration, took 

about 6 months to reverse that in the second Bush administration, 

and now the people who have put this nation back on the path to 

large-scale deficits, no matter what we do, large-scale deficits, just 

in time for the baby boomers to retire and start putting real pressure on Social Security and Medicare and say it doesn’t matter. 

Now, these people have the audacity to say, let’s amend the ConVerDate Jan 17 2002 08:38 Apr 04, 2003 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6601 G:\WORK\CONST\030603\85491.000 HJUD1 PsN: DOUGA
5

stitution with an unworkable amendment, so that they can go up 

and lie to the American people and says, see, we’re okay. We want 

to support balanced budgets. The other side, the Democrats don’t 

because they won’t vote, or some of them won’t vote for a balanced 

budget amendment. But obviously, it’s all a lie because they don’t 

care about a balanced budget because they told us that. 

So I’m going to put my statement, my written statement into the 

record because it dignifies this amendment by actually talking to 

its provisions. I’m not going to do that right now because frankly, 

the audacity, the dishonesty and the hypocrisy of bringing up this 

amendment at this time is so breathtaking, that if I actually started talking about the provisions of it, I’d probably violate some rule. 

So I’ll submit this for the record, Mr. Chairman. 

I yield back. 

Mr. CHABOT. Thank you. I think you already violated several 

rules during the course of that tirade, but we’ll overlook that at 

this time. 

I would ask unanimous consent to permit Mr. Istook to participate in the Committee. He’s the principal sponsor of the constitutional amendment. I would also ask that all Members have 5 legislative days in which to revise and extend their remarks and to include extraneous matter. 

And, Mr. Hostettler, did you want to make any type of opening 

statement? 

Mr. HOSTETTLER. No, thank you. 

Mr. CHABOT. Thank you. If not, I’ll go ahead and introduce the 

witnesses at this time. 

Our first witness will be John Berthoud, President of the National Taxpayers Union, and the National Taxpayers Union Foundation in Alexandria, Virginia. Founded in 1969, NTU is the Nation’s largest grassroots taxpayer group with 335,000 members in 

all 50 States. The foundation was founded in 1977 and provides 

critical research on a variety of tax and fiscal issues. Prior to joining NTU Dr. Berthoud worked for a variety of public policy organizations in Washington. He is presently an adjunct lecturer at 

George Washington University, teaching graduate level courses on 

budgetary politics. Mr. Berthoud has been a guest on hundreds of 

radio and television programs, and his work has appeared in a 

wide variety of publications across the country, and we welcome 

you here this afternoon, doctor. 

Our second witness will be Kent Smetters, Assistant Professor at 

the Wharton School at the University of Pennsylvania. Mr. 

Smetters received his Ph.D. in economics in 1995 from Harvard 

University and worked at the Congressional Budget Office from 

1995 to 1998, where he conducted research on Social Security and 

tax reform. He has been an assistant professor at the Wharton 

School since 1998, and served as a visiting professor at the Stanford Economics Department during the 2000–2001 academic year. 

Mr. Smetters was appointed Deputy Assistant Secretary for Economic Policy of the U.S. Treasury Department on July 3rd, 2001, 

where he served until August 30th, 2002, when he returned to the 

University of Pennsylvania. He remains active in Washington, 

D.C., including serving as a member of the Blue Ribbon Panel on 

6

Dynamic Scoring for the Joint Committee on Taxation. And we welcome you here this afternoon. 

Our third witness will be Richard Kogan, Senior Fellow at the 

Center on Budget and Policy Priorities. Mr. Kogan joined the Center in January 2001, specializing in Federal budget issues including aggregate spending, revenue surpluses and deficits and debt. 

This is his second tour at the Center, where he was a senior fellow 

in 1995 and 1996. Prior to that Mr. Kogan served for 20 years on 

the staff of the Committee on the Budget of the U.S. House of Representatives, most recently as the Director of Budget Policy. In 

1990 he designed and drafted the Budget Enforcement Act, which 

established caps on discretionary appropriations and the pay-asyou-go rule for tax and entitlement legislation. Prior to that Mr. 

Kogan served for 5 years in the Congressional Research Service, 

specializing in budgetary conflict between the Executive and Legislative Branches. He holds a B.A. from Yale University. And we welcome you here this afternoon as well. 

Our final witness will be William Beach, the John M. Olin Senior 

Fellow in Economics and Director of the Center for Data Analysis 

at the Heritage Foundation. As CDA Director, Mr. Beach oversees 

Heritage’s original statistical research on taxes, Social Security, 

crime, education, trade and a host of other issues. He was instrumental in developing the state of the art econometric models Heritage uses to estimate and detail how proposed tax changes will likely affect individuals, families and various business sectors, as well 

as the overall national economy. Prior to joining Heritage in 1995, 

Mr. Beach served as a litigation economist with two Kansas City, 

Missouri law firms, Campbell and Bisefield and Watson S. Marshall and Angus, where he specialized in analyzing how antitrust 

legal remedies will alter product pricing and availability. Later as 

an economist for Missouri’s Office of Budget and Planning, he designed and managed the State’s econometric model and advised the 

Governor on revenue and economic issues. Prior to that, Mr. Beach 

served as President of the Institute for Humane Studies at George 

Mason University. And we welcome you here this afternoon as 

well. 

And we will begin with Dr. Berthoud. 

STATEMENT OF JOHN BERTHOUD, PRESIDENT, NATIONAL 

TAXPAYERS UNION, NATIONAL TAXPAYERS UNION FOUNDATION 

Mr. BERTHOUD. Mr. Chairman, thank you very much. It’s a 

pleasure to be on a very distinguished panel. I must imagine I’m 

only going first because I have a last name that starts with a ‘‘B’’, 

although Bill Beach actually then should go first. But it’s a pleasure to be with this distinguished panel and before this distinguished Subcommittee today. 

Mr. CHABOT. Doctor, I forget to mention we ask everybody to 

limit it to 5 minutes, their testimony. We’ll give you an extra 5 seconds, sir, because I interrupted you. 

Mr. BERTHOUD. Thank you very much. I would like to just briefly 

today mention and summarize my remarks, focus in on two points, 

why deficits matter and what do we do about deficits. 

7

It’s the position of the National Taxpayers Union that we should 

enact the balanced budget amendment that is being considered 

today, and this will result in better public policy. In my testimony 

you will see I outlined four basic areas and four basic lines of reasoning why deficits to matter. 

First, savings and investment. I have a quote in my testimony 

from Herbert Stein: ‘‘The important effect of the absolute size of 

the deficit or surplus is the effect on private investment. That is, 

I think, the view now held by most, although not all, economists. 

The argument is simple. Private savings equal the sum of private 

investment plus the Government deficit. Private saving is totally 

absorbed in these two uses. The larger the Government deficit is, 

the smaller private investment will be—unless the larger Government deficit is matched by an equally larger total of private savings.’’

And he believes that when increases in Government spending 

drives deficits higher, there is an adverse impact for the economy 

as Government crowds out the more productive private sector activity. 

Secondly, second: inter-generational issues. Dr. Smetters, who 

will follow me, has—I will just defer to him and his terrific testimony, excellent testimony on long-term liabilities. 

Third. Public cynicism. Certainly and unfortunately, particularly 

in the last 5 or 6 years in Washington, the public has many reasons to be cynical about Washington and the operation of American 

politics. I think rising levels of distrust are poison in a system that 

is a democratic system based on the will and trust and participation of individual citizens. While there are other causes, I believe 

that large and continuous Federal deficits add to this distortion 

and cynicism. 

Finally, distorting the budget decision-making process. Deficits, 

we believe, lead to more Government than would otherwise be the 

case, and while different Members of the Committee, Mr. Scott 

mentioned, didn’t seem to support tax cuts being enacted. I think 

we have different visions on what might not be enacted were a balanced budget amendment enacted. The National Taxpayers Union, 

for example, would be very happy if we had a BBA last year, and 

that would have prevented perhaps something like the Farm Bill, 

which we lobbied hard against, being enacted. Mr. Scott perhaps 

would have been happy to see less tax cuts, but in any event, I 

think Washington would be a very different place. The output of 

Federal Government would be very different. 

How—in terms of how does deficit finance expand Government, 

let me offer another quote from Nobel Laureate Milton Friedman: 

‘‘As a strong supporter of a constitutional amendment requiring the 

Federal Government to balance its budget and limit spending, I 

clearly share the aversion to deficits that politicians of all shades 

of opinion have been expressing so loudly. But my reasons are 

quite different from theirs. In my view, the key question to deficits 

is political, not economic. The economic harm attributed to deficits—whether high interest rates, inflation or economic stagnation—comes not from the deficits but from the high level of Government spending.’’

8

And I certainly would think—again, I think the example I would 

point to—it’s hard to imagine in your balanced budget amendment—if we had a balanced budget amendment in place last year, 

things like the farm subsidy bill would have been enacted, but— and so Friedman finishes: ‘‘comes not from the deficits but from the 

high level of Government spending that those deficits help finance.’’ And I think the evidence that Dr. Friedman—the evidence suggests that Dr. Friedman is indeed correct. In 1962, total nondefense Federal outlays were a mere 9.5 percent of GDP. By 2002 

nondefense outlays were 16.1 percent of GDP, an increase in just 

40 years, 40 years of my life, of 69 percent. Mr. Nadler is of course 

correct, we did indeed balance the budget for several years. I 

would, with due respect, argue that it was much to do—I think 

Congressman Nadler said expenditures—— Mr. NADLER. Nadler. 

Mr. BERTHOUD. Excuse me, I’m sorry. Nadler said that expenditures were cut. The only area that we’ve really seen expenditures 

cut was—— Mr. NADLER. And taxes increased, I said both. 

Mr. BERTHOUD.—were national defense. Nondefense spending actually grew at a very healthy level. The two reasons, when I look 

at the numbers published by the CBO or OMB, of why we balanced 

the budget, I wish—and I know Republicans and Democrats unanimously would like to claim credit for that—much less individual actions by Congress and the President, but more the tremendous 

economy that we had in the late 1990’s and a massive cutback in 

national defense spending were the two reasons, with all due respect to the Members of the Committee and your dedication to deficit reduction. 

So it’s my belief that outside of—and NTU’s belief—that outside 

of a time such as late 1990’s, which was very much an anomaly in 

American history, and certainly you look at the last 40 years under 

Republican and Democrat controlled White House and Congress, 

we see continually and repeatedly deficits are the norm. I wish— Alice Rivlin and others have made a case that we need is better 

leadership. I wish that were the case. The fact is that we can’t 

have that on a continual basis. So as you yourself have said, Mr. 

Chairman, statutory measures have not worked, not worked well, 

not delivered us permanent deficit, ending of deficits, and so we— I think we need a permanent constitutional amendment which will 

require Congress and the President, year in and year out, to balance expenditures with revenues. 

[The prepared statement of Mr. Berthoud follows:]

PREPARED STATEMENT OF JOHN BERTHOUD

I. INTRODUCTION

Chairman Chabot and Members of the Subcommittee, my name is John Berthoud. 

I am President of the National Taxpayers Union (NTU), a nationwide grassroots lobbying organization of taxpayers with 335,000 members. You can find out all about 

NTU—and our educational affiliate, the National Taxpayers Union Foundation—on our website: www.ntu.org. 

I come here today to offer testimony in favor of the Balanced Budget Amendment 

(BBA) that has been introduced by Representative Istook, Representative Stenholm, 

and some 100 of their colleagues. This is the same Balanced Budget Amendment 

that passed the House with 300 votes in 1995, only to fall one vote short of the required 2⁄3 margin in the Senate. 

9

1 Herbert Stein, Presidential Economics: The Making of Economic Policy from Roosevelt to 

Clinton (Washington, DC: The American Enterprise Institute, 1994), Pages 350–351. 2Peter G. Peterson, Facing Up: How to Rescue the Economy from Crushing Debt and Restore 

the American Dream (New York, NY: Simon & Schuster, 1993), Page 223. 3 ‘‘Istook Introduces Balanced Budget Amendment,’’ Press Release of Representative Ernest 

Istook, February 13, 2003, http://www.house.gov/istook/rel-bba03.htm. 4 Charles Bowsher, ‘‘The Disinvestment of Government,’’ The GAO Journal, Number 4, Winter 

1988/89, Page 60. 

I will argue today that a BBA will improve the fiscal process of the United States 

and is in our long-term best interests—both economically and politically. 

II. THE PROBLEM OF DEFICITS

Large federal deficits have plagued the United States for decades. While the problem abated for four years at the end of the 20th century, we have now returned to 

deficits for the foreseeable future. As this Subcommittee well knows, the White 

House is now projecting deficits for this year and next in excess of $300 billion. And 

those figures don’t include the costs of any war in the Middle East. 

NTU believes deficits and debt lead to four fundamental problems for our economy 

and nation. 

1. Savings and Investment. While different studies have come to varied conclusions on the impact of deficits, most economists would agree that federal deficits are 

a problem insofar as they reduce private sector investment. Herbert Stein summarized the thinking of much of the economics profession when he noted:

[T]he important effect of the absolute size of the deficit or surplus is the effect 

on private investment. That is, I think, the view now held by most, although 

not all, economists. The argument is simple. Private savings equal the sum of 

private investment plus the government deficit. Private saving is totally absorbed in these two uses. The larger the government deficit is, the smaller private investment will be—unless the larger government deficit is matched by an 

equally larger total of private savings.1

NTU believes that when increases in government spending drive deficits higher, 

there is an adverse impact for the economy as government crowds out more productive private sector activity. 

2. Inter-generational Issues. Second, federal deficits add to our mounting 

generational imbalance—the huge fiscal burdens we are leaving for our children. 

Large federal deficits and debt on top of entitlement programs that are facing grave 

long-term financing problems are a terrible legacy for the future. 

The inter-generational aspects of debt have been a concern of leaders in this nation since the beginning of our country. To Jefferson, if one generation incurred a 

public debt, it was in violation of ‘‘natural law’’ because it raised ‘‘the question 

whether one generation of men has a right to bind another.’’ 2

Lead sponsor Ernest Istook has made the argument well, ‘‘While we manage our 

national and homeland security, we must plan ahead to guarantee that we return 

to a balanced budget once we overcome these challenges. We must assure our kids 

and grandkids inherit freedom and security, but do not inherit a crushing national 

debt.’’ 3

3. Public Cynicism and a Break-down in Government. Certainly, and unfortunately, the public has many reasons to be cynical about Washington and American politics. Rising levels of distrust of government are poison to a democracy. 

While there are other causes, we believe that large and continuous federal deficits 

add to this cynicism. 

Beyond turning off the public, large and continuing deficits lead to less responsive 

government. While some have made the case that a Balanced Budget Amendment 

would limit the flexibility of the country to respond to public crises, in reality, deficits are a far greater impediment. Comptroller General Charles Bowsher observed 

a number of years ago that: ‘‘The deficit has severely hampered the ability of the 

Congress and the administration to deal with emerging issues that are of growing 

importance to the American people.’’ 4 Bowsher cited AIDS as one example of a problem not dealt with promptly because of our large deficits. 

4. Distorting the Budget Decision-making Process. Finally, deficits lead to 

more government than would otherwise be the case. This is bad for two reasons: 

besides leaving society with a non-optimal mix of government and private sector, 

larger government also means lower economic growth. 

How does deficit finance expand government? Nobel Laureate Milton Friedman 

said in 1984 that:

10

5 James Savage, Balanced Budgets & American Politics, (Ithaca, NY: Cornell University Press, 

1988), Page 9. 6Table 8.4, Fiscal Year 2004 Historical Tables, Budget of the United States Government. During that same period, national defense dropped from 9.2 percent of GDP to 3.4 percent. 7 Charles Wolf, Jr., Markets or Government: Choosing Between Imperfect Alternatives (Cambridge, MA: MIT Press, 1988), Page 146. Lewis Uhler extrapolates from these findings: ‘‘Assume 

that the United States were to reduce the proportion of its spending at all levels of government 

from 40 percent of our Gross Domestic Product (GDP) to about 20 percent. Assuming a current 

average annual economic growth of about two percent, we would double the average annual rate 

of growth of our nation’s economy—and compound that every year.’’ (Lewis Uhler, Setting Limits: Constitutional Control of Government, (Washington, DC: Regnery Gateway, 1989), Pages 83– 84.) 8 Alice Rivlin, ‘‘Reform of the Budget Process,’’ American Economics Association Papers and 

Proceedings, May 1984. 9See John Berthoud, Gramm-Rudman-Hollings: The Fiscal Weapon of Public Choice? (New 

Haven, CT: Yale University Doctoral Dissertation, Department of Political Science, 1992); SungDeuk Hahm, Mark S. Kamlet, David C. Mowery, and Tsai-Tsu Su, ‘‘The Influence of the 

Gramm-Rudman-Hollings Act on Federal Budgetary and Fiscal Policy Outcomes 1986–1989,’’

Paper presented to the Annual Meeting of the Southwestern Political Science Association, March 

27–29, 1991. 

As a strong supporter of a constitutional amendment requiring the federal government to balance its budget and limit spending, I clearly share the aversion 

to deficits that politicians of all shades of opinion have been expressing so loudly. But my reasons are quite different from theirs. In my view, the key question 

to deficits is political, not economic. The economic harm attributed to deficits—

whether high interest rates, inflation or economic stagnation—comes not from 

the deficits but from the high level of government spending that those deficits 

help to finance.5

Taxes are the price we the citizenry pay for government services. When government pays for programs through deficit finance, the price of government for today’s 

citizens declines. Given this subsidy from future generations, it is only natural that 

we as a society will thus opt for more government than we would have chosen if 

we had to pay the full price for it. By analogy, if a consumer is weighing whether 

to buy a Pepsi for $1 or remain thirsty, it may be a tough choice. If that consumer 

can pass half the cost of that Pepsi onto some unknown person living in the future, 

the choice to consume becomes very easy. 

The evidence is suggestive that Friedman is correct that allowing deficit finance 

leads to higher spending. In 1962, total non-defense federal outlays were 9.5 percent 

of GDP. By 2002, non-defense federal outlays were 16.1 percent of GDP, an increase 

of 69 percent.6

And there is a growing body of evidence linking high government spending with 

lower economic growth. For example, a Rand Corporation study found that for every 

10 percent of a nation’s total annual income that is spent by government, the average growth rate of that nation’s economy is reduced by one percent annually.7

Because of the inverse relationship between government spending and economic 

growth, through holding down deficits and excessive government spending, we can 

substantially increase our long-term economic prosperity. 

III. STATUTORY MEASURES JUST WON’T SUFFICE

So it seems clear that deficits driven by higher federal spending harm the economy. The question is, how can we stop deficits? 

Alice Rivlin and others have made the case that rather than procedural changes 

such as a Balanced Budget Amendment, we need more virtuous leadership in Washington.8 This is not a new plea in American politics and unfortunately, proponents 

of better leadership for the nation have yet to explain how such leadership is to be 

permanently attained. This goal is as illusory in the 21st century as it was in the 

18th century, when it was discussed at length in The Federalist Papers. 

So we need some procedural change. In light of the difficulty of passing a constitutional amendment, there have been numerous efforts since adoption of the Congressional Budget and Impoundment Control Act in 1974 to statutorily change the budget rules to fight deficits. 

The most ambitious of these efforts was the Gramm-Rudman-Hollings experiment 

of 1985–1990. This effort may have modestly reduced deficits—on the order of $15 

billion per year, mainly through limiting spending.9 But the same factor that undermined the law’s effectiveness ultimately killed it—Gramm-Rudman-Hollings was a 

mere statute. Congress and the President could roll back, and in the end terminate, 

the deficit targets when the political decisions became too tasking. 

11

10Statement of Congressman Steve Chabot, Chairman, House Judiciary Subcommittee on the 

Constitution, Introduction of the Balanced Budget Constitutional Amendment, February 13, 

2003. 11The Associated Press, ‘‘Balanced Budget Amendment Introduced,’’ February 13, 2003, http:/

/abcnews.go.com/wire/Politics/ap20030213—1522.html. 

Mr. Chairman, as you yourself have summarized, ‘‘legislative efforts to balance 

the budget have proven largely unsuccessful in limiting deficit spending. The surpluses we enjoyed for the last few years have proven to be a short-term anomaly 

as Congress has repeatedly relaxed deficit targets and circumvented statutory 

spending limits . . . Given the propensity of Congress to evade legislative efforts to 

control spending, a constitutional amendment is the most effective—and perhaps 

only—way to ensure that Congress balances its budget each year.’’ 10

Only a constitutional guarantee will deliver year after year of balanced budgets 

for the United States. As Judiciary Committee Chairman Sensenbrenner has stated, 

‘‘The time has come for a little constitutional supervision over the Congress, just 

like we have to have parental supervision over our children.’’ 11

IV. CONCLUSION

There are no magic solutions in public budgeting or public policy in general. NTU 

does not pretend that the BBA will instantly cure all the nation’s fiscal problems 

or correct all long-term financial imbalances. But we come before this distinguished 

Subcommittee today to state that enactment of a Balanced Budget Amendment 

would without a doubt produce superior results to the policies of the preceding decades. 

The version of the BBA that Representatives Istook and Stenholm have introduced is very good. There are no loopholes in it—as we’ve seen in other versions 

of the BBA that Congress has considered over the years. The National Taxpayers 

Union and our 335,000 members urge the Subcommittee to favorably report this 

measure. Thank you.

Mr. CHABOT. Thank you. 

Mr. BERTHOUD. Thank you 

Mr. CHABOT. Dr. Smetters? 

STATEMENT OF KENT SMETTERS, ASSISTANT PROFESSOR, 

THE WHARTON SCHOOL 

Mr. SMETTERS. Thank you, Chairman and the Members of the 

Committee for the opportunity to speak on this amendment. I support—I applaud the supporters of this amendment and their efforts. 

But in order to significantly increase the effectiveness, I would 

urge you first to reform the flawed cash-flow accounting system 

that is currently being used by the Government, and upon which 

this amendment is necessarily based. In fact the accounting system, if it was used in the private sector, would be illegal. As a director and officer you would go to jail if you used the current accounting system as used by the Federal Government because it ignores massive future liabilities. 

My written remark is pretty comprehensive. I’ll just make three 

short points here. 

First, I’d focus on the—simply on the debt held by the public, 

which is in fact a backward-looking measure. This amendment 

would ignore a large burden that’s actually being passed on to future generations. The Government right now says that we’re passing a debt to future generations of about 4 trillion, but if you had 

to calculate it properly, using actuarial principles, the debt is actually closer to $43 trillion. $35 trillion of this imbalance comes from 

Medicare, and thee are 7 trillion from Social Security. The rest of 

the Government is in pretty good shape with an imbalance of only 

12

about .7 trillion, and by the way, this includes the President’s newest proposed tax cuts. And so by present value, we mean we have to come up with $43 

trillion immediately today in order to put fiscal policy in the U.S. 

on a sustainable course, so if we wait, we would have to come up 

with more than $43 trillion in future years to put fiscal policy on 

a sustainable course. 

Let me give it to you in the form of an example. Suppose that 

we shut down half of the Government, military, law enforcement, 

Medicaid, NASA, everything, half of the Government, everything 

except Social Security and Medicare. And we do that not just this 

year, but we do it forever. Now, the current budget projection of 

$150 billion deficit for next year would turn into a $600 billion surplus. That sounds like a lot of money, and in fact, it would be surpluses for the next few years, but we would still accumulate surpluses too slowly over time to actually fix Social Security and Medicare. We’d actually be still—in net present value, be in the hole by $3.2 trillion. 

So the problems facing our country are huge. So we need to do 

more than just balance the budget today. We actually need to make 

large changes that place Social Security and Medicare in particular 

on a sustainable course. 

Unfortunately the Government’s budget documents are not for- ward looking this way. The $43 trillion imbalance is not being 

shown on the books. Instead, the budget simply directs the public’s 

measure to debt held by the public, which is a backward-looking 

measure. 

So my second point is that by focusing only on the traditional 

measure of the debt, this resolution could actually make it harder, 

even though I support the general principles, it could actually 

make it harder to reduce the Government’s true liabilities facing 

our country. For example, the Social Security Commission, recently 

appointed by the President, recommended three different models. 

Each model would increase the debt held by the public, and so 

under the traditional focus of debt held by the public, things would 

look worse under those models. But each of those models would actually decrease future liabilities of the Government, which aren’t 

being tracked right now in our accounting system, by more than 

the increase in the debt being held by the public. So the Government’s position would actually improve overall. But because we 

only focus on the debt, we don’t report the other liabilities, so that 

it actually looks worse, but it in fact would actually improve things. 

So current discussions about Social Security and Medicare reform start from a biased position because we only focus on one of 

the liabilities and ignore the rest, which again would be illegal in 

the private sector. 

My third point is this. I support the general principles of this 

bill, but I ask you to go simply one step further, and first reform 

the accounting in order to get all the liabilities right. So I would 

ask you to expand the scope of this amendment in order to account, 

for example, for all the 43 trillion, and not just the 4 trillion. 

In my written testimony, which is much more comprehensive, I 

have some ideas, in fact, particular ideas of exactly how to go about 

that. 

13

But let me, in closing, simply make this remark. In the past 

year, we saw how dubious private sector accounting led to lots of 

problems, and then it’s large cash flows for periods of time, only to 

be revealed much later on. And as a result, lots of pensioners and 

shareholders lost lots of money, and sometimes the Government’s 

doing that right now. We’re hiding massive liabilities and who’s 

going to pay the price for future generations? We, right now, have 

to make massive cuts. And so I think the time to act really is now, 

and for the Government to show by example. Thank you. 

[The prepared statement of Mr. Smetters follows:]

PREPARED STATEMENT OF KENT SMETTERS

Thank you Chairman Chabot and members of the Committee for the opportunity 

to speak on The Balanced Budget Amendment, H.J. Res 22. I support practically 

any effort to make it harder for one generation to pass large fiscal burdens to future 

generations, especially when it is not due to a recession or war. So I applaud the 

supporters of H.J. Res 22 in their efforts. 

In order to significantly increase the effectiveness of this Amendment, I would, 

though, urge you to first reform the flawed cash-flow accounting system that is currently being used by the federal government and upon which H.J. Res 22 is necessarily based. The government reports that the national debt in 2003 was about 

$3.8 trillion in the form of government ‘‘debt held by the public.’’ But that number 

ignores massive imbalances in the Medicare and Social Security programs and the 

government’s other programs. When the liabilities associated with those programs 

are taken into account, the nation’s fiscal policy is currently off-balance by over 

$43.4 trillion in present value, a number that is not reported in standard budget 

documents. So, a balanced budget amendment that fails to include the present value 

of the future shortfalls would miss over nine-tenths of the burden that must be paid 

in the future in the form of tax increases, benefit cuts, or both. In fact, by focusing 

only on the traditional measure of debt, as does H.J. Res 22, it could actually make 

it harder to reduce the true total liabilities facing our country. 

In sum, I support an amendment to control the burdens being placed on future 

taxpayers. But I would urge supporters of H.J. Res 22 to go even further and include all of the liabilities that are currently ‘‘off the balance sheet’’ in the government’s current accounting. 

FOCUSING ON THE TRADITIONAL DEBT MEASURE

MISSES MASSIVE BURDENS ON FUTURE GENERATIONS

As of January, 2003, the public held about $3.8 trillion of government debt. But 

that statistic only reflects the excess of past government spending over past revenue. To be sure, less debt is a good thing since it requires less future debt service. 

But it says very little else about the future. For example, a person who is currently 

free of debt still faces a problem if his future monthly rent is projected to consistently exceed his monthly income. Similarly, U.S. fiscal policy is promising current 

and future generations many more benefits than can be afforded. 

Here are the numbers. Table 1 shows that projected future spending across all 

federal programs plus the amount of debt currently held by the public exceeds projected future revenue by $43.4 trillion in present value, as of 2003. That imbalance 

is over 11 times the $3.8 trillion debt held by the public that the government officially reports. $35.5 trillion of this $43.4 trillion imbalance stems from Medicare 

(Parts A and B) alone while Social Security accounts for another $7.2 trillion. The 

rest of the government is in relatively good shape and has an imbalance of only 

$0.68 trillion. These estimates were made with a detailed model developed by 

Jagadeesh Gokhale and myself during our time in the Bush Administration. They 

conform to the Administration’s newest economic and demographic assumptions, as 

just released in the President’s 2004 budget, and they incorporate all of the President’s new proposed policies, including, for example, his new tax reduction plan and 

prescription drug plan. 

By ‘‘present value,’’ we mean that all future spending and revenue are not only 

reduced for inflation but are additionally discounted by the government’s (inflationadjusted) long-term borrowing rate. This calculation allows us to determine how 

much money the government must come up with immediately in order to put fiscal 

policy on a sustainable course. Alternatively, the government must make cuts or inVerDate Jan 17 2002 08:38 Apr 04, 2003 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 G:\WORK\CONST\030603\85491.000 HJUD1 PsN: DOUGA
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crease revenue totaling more than $43.4 trillion in future years so that, when discounted to today, the sum of those cuts and extra revenue equals $43.4 trillion. 

The current fiscal imbalance is so large that it needs to be put into context. As 

an example, Table 1 shows that the government could, in theory, put the country 

on a sustainable course by raising the payroll tax on all uncapped earnings by 16.3 

percentage points starting in 2004 and lasting forever. That would forever more than 

double the amount of taxes that are already being paid by employees to the Social 

Security and Medicare systems and the dollar-for-dollar matching paid by their employers. But even this calculation is conservative in that it assumes that taxes are 

raised on uncapped earnings, which is a larger tax base than used by Social Security. If capped earnings were taxed, an even larger tax rate would be needed. 

Waiting just four years (until 2008) to implement this type of tax hike would require a permanent tax increase of 17.4 percentage points to close an even larger imbalance of $51.5 trillion. The fiscal imbalance grows by about $1.5 trillion each year 

between 2004 and 2008 (Table 1). That number is about ten times the deficit that 

the government officially projects for 2004. As with government debt, the fiscal imbalance grows with interest if no reforms are taken. 

Such tax increases, of course, would probably put our economy into a tailspin. And 

so the above example is not intended as policy advice. But these calculations show 

the magnitude of the current fiscal imbalance and emphasize the need for real reform today. The longer the delay in reforming the nation’s fiscal policies, the more 

drastic are the changes required. 

Let me describe the current $43.5 trillion shortfall another way. Instead of raising 

payroll taxes, suppose we eliminate half of the rest of the federal government in 

2004 except for Social Security and Medicare. In particular, we eliminate half of the 

federal government’s spending on the military, homeland security, roads, education, 

veteran’s affairs, agriculture, labor affairs, NASA, commerce, law enforcement, Medicaid, etc.—everything expect for Social Security and Medicare. And we do this not 

just in 2004 but forever. Also suppose that we don’t change federal taxes so that 

people continue to pay taxes as projected. Now, for example, the $150 billion deficit 

projected for 2004 would turn to a $600 billion surplus! That sounds like a lot of 

money. But we would still accumulate surpluses too slowly over time. In particular, 

we would still be left with a fiscal imbalance of about $3.2 trillion. In other words, 

shutting down half of the rest of government forever is not enough to put the U.S. 

fiscal policy on a sustainable course. 

We need to do more than just balance the budget today. We need to make large 

changes that place Social Security and Medicare, in particular, on a sustainable 

course in order to avoid placing huge burdens on future generations in the form of 

higher taxes or reduced benefits. 

THE FOCUS ON THE TRADITIONAL DEBT MEASURE

MAKES IT HARDER TO REDUCE LIABILITIES

And so why don’t we see real reform yet? The reason is that, unfortunately, the 

government’s budget documents are not forward looking. The $43.4 trillion imbalance is not shown in the official budget. Instead, the budget directs the attention 

of the public and policymakers to the level of government debt, which, in turn, creates a bias against reform. 

To understand the budget’s current bias against reform, suppose that individuals 

are given the option to invest some of their payroll contributions into personal accounts that they would own and control. In exchange for this option, a person’s Social Security benefit is reduced one dollar in present value for each payroll dollar 

invested. The retirement benefits of those choosing personal accounts, therefore, 

would be composed of reduced Social Security benefits plus additional income derived from their personal account assets. 

Because those currently covered under Social Security’s pay-as-you-go system 

must still be paid their benefits, government borrowing would increase. Under the 

traditional focus on government debt, therefore, this reform would appear unfavorable. But debt interest is just one component of the government’s liabilities. The 

government’s liabilities also include future Social Security benefits, which would decrease under this reform. In fact, future Social Security liabilities would decrease 

by exactly the same amount as the increase in the debt. The government’s true financing position, therefore, would remain unchanged by this reform. 

In other words, current discussions about reform start from a biased position 

since even a neutral reform looks bad under current budgeting. In fact, the government’s failure to properly account for future shortfalls is the culprit behind the popular myth that creating personal savings accounts requires a large ‘‘transition cost.’’

As the above reform experiment shows, it is possible to give people choice and conVerDate Jan 17 2002 08:38 Apr 04, 2003 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6621 G:\WORK\CONST\030603\85491.000 HJUD1 PsN: DOUGA
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trol over their assets without any transition costs when properly measured. Of 

course, a ‘‘transitional investment’’ is needed to actually increase national saving. 

Now let’s drive the point home by modifying this example. Suppose that future 

Social Security benefits were now reduced by a little more than one dollar for each 

dollar of payroll a person invests into her personal account. This example is similar 

to Model 1 of the President’s Social Security Commission. Many people might choose 

this plan in order to have more control over their retirement resources, freeing them 

somewhat from a risky government plan. But from the perspective of policymakers, 

this reform would also increase the government’s debt since the government still 

needs resources in order to meet current benefit obligations. The government’s true 

fiscal imbalance, however, would actually decline immediately under this plan because future Social Security obligations would fall by more than the increase in government debt. 

The traditional focus on government debt, therefore, creates a bias in decisionmaking against potential reforms that could actually improve the government’s financial position. A more complete accounting, which explicitly recognizes the future 

net obligations of Social Security and Medicare as well as the rest of government, 

would help remove this bias. Hence, before the Constitution is amended to balance 

the budget, the government’s outdated accounting methodology needs to be reformed 

to include future liabilities as well. 

IMPROVING THE GOVERNMENT’S ACCOUNTING METHODOLOGY

Table 1 captures the key ingredients that any thorough budget measure must include. Table 1 has three key features:

1. It decomposes the fiscal imbalance into that On Account of Living and Past 

Generations as well as that On Account of Future Generations.

2. It covers all government outlays and revenue sources.

3. It discounts federal outlays and revenues across all future years.

Let me expand on each of these three points. 

Generational Decomposition of Fiscal Imbalances 

Table 1 shows that Social Security’s $7.2 trillion imbalance as of 2003 is caused 

by large transfers to living and past generations. In particular, past and living generations are projected to receive $8.9 trillion more in benefits in present value than 

they have paid and will pay in taxes. In other words, the government promised 

these generations much more in the way of benefits than it collected from them in 

taxes. In contrast, future generations are projected to pay $1.7 trillion more in taxes 

in present value than they will receive in benefits, and so they help reduce the imbalance a little bit. But their net contribution of $1.7 trillion is not enough to overcome the $8.9 trillion ‘‘overhang’’ left over from the windfall given to past and current generations. For Social Security to fully return to balance, living and future 

generations must receive fewer benefits and/or pay more taxes equal to the difference, or $7.2 trillion, in present value. 

In sharp contrast, Table 1 also shows that a majority of Medicare’s imbalance as 

of 2003 is on account of future generations. Future generations are projected to con- tribute $19.6 trillion to Medicare’s total imbalance of $35.5 trillion while past and living generations contribute about $16 trillion. The reason that future generations 

contribute more to Medicare’s fiscal imbalance is due to the projected rapid growth 

in future medical expenses per capita. As with Social Security, either current or future generations must receive fewer benefits or pay more taxes—$35.5 trillion worth 

in present value in this case—in order to restore Medicare to sustainability. 

At first glance, one might think that this generational decomposition is just ‘‘extra 

information’’ that is not crucial to the creation of an honest budget measure. That 

conjecture, though, would be very wrong. The decomposition information serves two 

related purposes:

(i) THE GENERATIONAL DECOMPOSITION REVEALS FUTURE BURDENS 

THAT WON’T BE DETECTED BY EITHER THE FISCAL IMBALANCE OR 

DEBT MEASURES.

The fiscal imbalance measure only indicates the degree to which policy is 

unsustainable; it, alone, does not indicate future burdens. Without the generational 

measures, policymakers could still creating large future burdens in a hidden manner. So, all the measures are needed. 

As an example, suppose the U.S. Congress increased Medicare benefits and financed it by hiking payroll or other taxes by an equal amount each year. In other 

words, this new benefit is financed on a pay-as-you-go basis. This policy would not 

16

change Medicare’s fiscal imbalance because the new outlays are exactly matched by 

new revenues. As a result, the federal government’s total fiscal imbalance would not 

change either. The debt held by the public would also not change since the new benefit is exactly financed by new revenue. 

But this policy would still reduce the resources of future generations. The reason 

is that living retirees at the time of the new policy would gain from the new benefit 

for which they paid nothing during their working years. Also, many older workers 

at the time of this policy change would gain since they only have to help finance 

the new benefit for an abbreviated amount of time. Some younger workers and most 

future generations, however, would be worse off because they must pay for the benefit during a larger fraction of their working life. Since their payroll contributions 

are being transferred to the elderly rather than saved and invested, they lose a 

large amount of investment income that could have been derived from these resources. In the context of Table 1, this new policy would increase Medicare’s imbalance On 

Account of Living and Past Generations by the same amount as it would decrease 

Medicare’s imbalance On Account of Future Generations, leaving its overall fiscal 

imbalance unchanged. In other words, living and past generations would receive a 

windfall that is directly offset by reducing the resources available to future generations. This redistribution can be captured only by showing the contributions of different generations to the overall imbalance.

(ii) THE GENERATIONAL DECOMPOSITION ALLOWS POLICYMAKERS TO 

MAKE MORE INFORMED DECISIONS WHEN DECIDING AMONG DIFFERENT SUSTAINABLE FISCAL POLICIES.

We can think of informed fiscal policymaking as involving two sequential steps. 

First, policymakers must decide on the set of possible fiscal policies that will place 

the nation’s fiscal policy on a sustainable path, i.e., produce no total fiscal imbalance. The range is large. For example, policymakers could increase taxes, reduce 

benefits, or a combination of both. Also, these changes can be made immediately; 

alternatively, even more drastic changes could be made in the future. However, 

while each of these approaches can be used to produce a zero fiscal imbalance, each 

approach will typically yield a very different impact on the resources of each generation. For example, deciding to start decreasing the growth rate of Social Security 

and Medicare benefits today will be much more beneficial to future generations than 

increasing taxes over time. So the generational decomposition information helps policymakers decide among these options. The second step, therefore, is for policymakers to choose the specific plan among the set of sustainable policies that they 

believe produces the best tradeoff between generations. 

All Sources of Outlays and Revenues 

Another key feature of the budget measure shown in Table 1 is that it includes 

all of the federal government’s sources of outlays and revenues. At first glance, it 

might seem necessary to only include the Social Security and Medicare programs 

since those programs are the ones in the most trouble. But that approach would be 

a major mistake for two related reasons.

(i) REPORTING ONLY THE IMBALANCES IN THE SOCIAL SECURITY AND 

MEDICARE PROGRAMS WOULD ALLOW FOR BUDGET MANIPULATION.

Suppose, for example, that legislation were passed that committed some of the future general tax revenue to the Social Security and Medicare programs. Under the 

accounting statement shown in Table 1, the total federal fiscal imbalance would remain unchanged because the ‘‘Imbalance of the Rest of Federal Government’’ would 

increase dollar-for-dollar with the decrease in the imbalances for Social Security and 

Medicare. In other words, Table 1 would correctly show that nothing of substance 

was done by simply redirecting money from one account to another. However, if only 

the ‘‘Imbalance in Social Security’’ and ‘‘Imbalance in Medicare’’ were shown, it 

would incorrectly appear that this simple transfer improved things. 

Another relevant example is the increase in Social Security payroll taxes during 

the mid 1980s. While these payroll tax increases clearly reduced the imbalance facing Social Security by increasing the size of the trust fund, a considerable debate 

among academics has emerged as to whether these payroll taxes really reduced the 

government’s total fiscal imbalance. In particular, if the extra tax monies were actually spent by the rest of the government then any reduction in Social Security’s imbalance may have been offset by an increase in the imbalance in the rest of the federal government. A comprehensive measure, therefore, would make everything 

clear.

17

(ii) REPORTING THE IMBALANCE OF THE REST OF THE FEDERAL GOVERNMENT ALSO ALLOWS FOR MORE INFORMED POLICY DECISIONS

What ultimately matters for the issue of sustainability is the federal government’s total fiscal imbalance. Still, understanding how that imbalance is divided between 

the different programs is informative. Notice, for example, that almost the entire 

federal government’s fiscal imbalance is due to the Social Security and Medicare 

programs. The rest of the government is almost in balance, even though this measure includes the President’s most recent tax proposals. 

Indeed, Table 1 puts the President’s most recent tax proposal in its proper context. Notice that the President’s tax proposal does not produce a large Imbalance 

in the Rest of the Federal Government. Indeed, I hope that the President’s plan will 

someday be followed by even more aggressive measures to reduce the marginal cost 

of investment in the U.S., including allowing companies to immediately expense all 

capital equipment in the year purchased. Eliminating the personal dividend tax 

along with a move to full expensing would effectively shift the U.S. tax system to 

a progressive-based consumption tax, which would promote investment while still 

preserving the important risk-sharing value of a progressive tax system. 

Of course, there are some people who will argue that any surpluses in the rest 

of government could be used to help address the problems facing Social Security and 

Medicare. To be sure, these crippling programs could be helped somewhat in this 

manner. Still, there is a certain irony to attempting to bail out Social Security and Medicare using general revenue: the very purpose of using an earmarked payroll tax for 

these programs—and a fairly regressive tax at that—was to create a sense of entitlement of pension-like benefits upon retirement. If we start making significant general revenue transfers, how do we differentiate Social Security and Medicare from 

a standard welfare program? Are people still ‘‘entitled?’’ Indeed, suppose that the 

tables where turned so that the Social Security and Medicare programs were in fine 

shape but the rest of government was not. Would it be okay then to raid the trust 

funds of these programs to pay for the rest of government? Presumably, those advocating general revenue transfers today would oppose robbing pensioners of their ‘‘en- titlements.’’ In any case, we cannot ‘‘nickel and dime’’ our way to saving Social Security and 

Medicare. We need serious reform of those programs. The costs and benefits of tax 

reform, national security, and other programs need to be basically decided on their 

own. 

Including all Future Years 

Table 1 also reports the imbalance associated with the federal government’s fiscal 

policy across all future year, and not just over a fixed time window such as the next 

75 years. There is widespread agreement among economists—both politically conservative and liberal—that it is incorrect to look at only a fixed time window when 

computing the fiscal imbalance. All future years must be included: ignoring problems projected for years beyond a fixed time window incorrectly discounts the revenues and outlays in those years at a rate of infinity. To be sure, the President’s 2004 Budget reports an $18 trillion fiscal imbalance for Medicare and Social Security over just the next 75 years. But that choice was due to a technical issue: the 

actuaries at the Centers for Medicare and Medicaid Services (CMS) and the Social 

Security Administration had not yet developed the tools for making longer-term estimates. There is widespread agreement in the Administration, in fact, that a fiscal 

imbalance measure must include all years. 

The Social Security and Medicare Trustees’ Reports show imbalances for those 

programs as a fraction of payroll for just a 75-year time horizon. Unfortunately, the 

75-year horizon, therefore, has become a standard measuring stick in government, 

and so some historical background might be useful. Before 1965 (and, hence, before 

Medicare), the Trustees calculated the imbalances associated with Social Security’s ‘‘scheduled benefits’’ based on all future years and not just 75 years. However, at 

that time, Social Security benefits were not indexed to prices and so they incorporated no inflation protection. Instead, Congress would pass legislation every couple years to increase the nominal value of benefits. As a result, it was widely known 

that the ‘‘scheduled benefits’’ associated with any particular law would not materialize as the actual level of benefits just a few years later. However, the Trustees 

are charged with describing the law as it stands, not with how they think it will 

evolve. But since the Trustees did not have that much confidence in their estimates, 

they decided to shorten the forecasting period to 75 years. Yet even they agreed that 

including all future years was the appropriate choice in theory. 

Today, retirement benefits, however, are now indexed for prices after a person 

reaches retirement. Moreover, shortly before reaching retirement, a person’s Social 

18

1See, for example, James M. Poterba, ‘‘State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics.’’ Journal of Political Economy, Vol. 102, No. 4. (Aug., 1994), pp. 

799–821. Also see Henning Bohn and Robert P. Inman, ‘‘Balanced-Budget Rules and Public Deficits: Evidence from the U.S. States.’’ Carnegie-Rochester Conference Series on Public Policy, 45 

(1996), pp. 13–76. 

Security benefit is automatically increased by an additional amount to account for 

the real wage growth over his or her lifetime. The practical motivation for using a 

truncated 75-year window, therefore, no longer exists. Indeed, after a thorough investigation and discussion, the Social Security and Medicare Trustees voted in November, 2002, to begin including in their next Reports the imbalance for the Social 

Security program, as calculated across all future years. They will have to revisit the 

issue, though, for Medicare in the future, once CMS develops the ability to make 

their own estimates. 

INCORPORATING LONG-TERM LIABILITIES INTO THE AMENDMENT

I would be delighted to work with this Committee to ensure that a balance budget 

amendment would focus on a liability measure that is more comprehensive than the 

backward-looking debt measure. I believe that the following points should be part 

of any amendment:

1. The Office of Management and Budget as well as the Congressional Budget 

Office must produce an annual report that captures the information shown 

in Table 1. Require that Table 1 be calculated for any proposed legislation 

that would materially affect its contents.

2. For budget reports generated by the OMB, establish a group of Federal 

Budget Trustees that replaces the current TROIKA structure. Federal Budget Trustees would be composed of six Government Trustees (Director of OMB 

serving as Managing Trustee; Chairman of the Council of Economic Advisor; 

Secretaries of Treasury, HHS, and Labor; Social Security Commissioner) as 

well as an equal number of Public Trustees (half appointed by the White 

House and half appointed by Congress). Each Public Trustee would serve one

term for six years. Each Trustee would have one vote with any action approved by the majority. A similar structure could be implemented for budget 

reports generated by the CBO. Similar to the current Social Security and 

Medicare Trustees, the Federal Budget Trustees would be charged with deciding the underlying economic and demographic assumptions. Policy decisions, of course, would still be left to the White House and Congress, respectively.

3. By 2008, Congress must pass legislation that produces a zero Total Federal 

Fiscal Imbalance. All subsequent legislation cannot produce a positive Total 

Federal Fiscal Imbalance unless approved by 3⁄5 of Congress by rollcall vote. 

Even in the case of a war or a recession, Congress must pass legislation 

specifying how they plan to pay for the costs in the future in order to 

produce a zero Total Federal Fiscal Imbalance, unless overridden by a 3⁄5 majority.

4. After 2008, any decrease in the Total Federal Fiscal Imbalance On Account 

of Future Generations caused by policy changes must be approved by 3⁄5 of 

Congress by rollcall vote. This requirement will ensure that Congress does 

not attempt to achieve a zero Total Federal Fiscal Imbalance by proposing 

unrealistic benefit cuts or tax increases on future generations. It would also 

make it harder for Congress to pass pay-as-you-go financed programs that 

hurt future generations. But, unlike a prohibition on annual unified deficits, 

this restriction would still allow Congress, for example, to use debt to reduce 

future Social Security liabilities, and it also permits using automatic stabilizers during recessions. 

IN CLOSING

Currently, every State in the U.S. except one has a constitutional or a statutory 

restriction limiting the ability of those states to run deficits. Between 1970 and 

1990, these budget rules appear to have been effective in controlling government 

spending in those States with the most restrictive requirements.1 In more recent 

years, however, many States have effectively raided their public-employee pension 

funds using so-called Pension Obligation Bonds and other tricks. The evidence from 

the States, therefore, shows that (i) budget rules can indeed be effective in controlVerDate Jan 17 2002 08:38 Apr 04, 2003 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 G:\WORK\CONST\030603\85491.000 HJUD1 PsN: DOUGA
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ling spending but (ii) these rules must be specified in a way to prevent manipulation. 

Similarly, a federal balanced budget amendment to the U.S. Constitution could 

be effective in controlling the federal government’s spending. But unless the scope 

of H.J. Res 22 is expanded to include all of the government’s future liabilities beyond debt service, H.J. Res 22 is open to the same manipulation by future members 

of Congress. As shown earlier, the debt held by the public is a backward-looking 

measure that misses over nine-tenths of the burden that must be paid in the future 

in the form of tax increases, benefit cuts, or both. Moreover, by focusing on this traditional but narrow debt measure, H.J. Res 22 could make it harder to reduce these 

other liabilities unless the scope of H.J. Res 22 is explicitly expanded to include 

them. 

The time for recognizing these liabilities could not be more appropriate. We have 

seen in the past year how dubious private-sector accounting hides large cash flow 

shortfalls for a period of time, only to be revealed later at a great loss to pensioners 

and other shareholders. Congress and the President responded by passing the Sarbanes-Oxley Act of 2002. The federal government now needs to lead by example by 

getting its own books into shape as well. 

Fortunately, some members of the Administration are indeed taking notice. For 

example, in a November 14, 2002 speech in Columbus, Ohio, Treasury Undersecretary Peter Fisher argued that ‘‘we need to bring this forward-looking understanding 

out of the shadows. We need to shine the same spotlight on it that the annual deficit and total debt receive in our government’s budget rituals.’’ Both The Office of 

Economic Policy at the U.S. Treasury and OMB are now actively engaged in studying ways to more properly account for the federal government’s future liabilities. 

Also, as mentioned earlier, the Social Security and Medicare Trustees recently voted 

to show longer-term shortfalls for the Social Security program in their annual report, although they have not yet taken up the matter for Medicare. Finally, Alan 

Greenspan has recently endorsed reforming the budget to account for future liabilities. But, until future shortfalls are properly documented and become the primary 

basis of analyzing policy, reforms that address the nation’s $43.4 trillion (and growing) imbalance could remain on hold. 

So, in sum, I strongly applaud the efforts of supporters of H.J. Res 22. I urge 

them, however, to go even further and expand the scope of H.J. Res 22 to include 

all of the federal government’s liabilities besides just debt service. 

Kent Smetters served as Deputy Assistant Secretary of Economic Policy at the 

U.S. Treasury from June 2001-September 2002 where he worked on budget reform, 

Social Security reform, and coordinated The Social Security and Medicare Trustees 

Working Group that reformed the annual Trustees’ Reports. He returned to The 

Wharton School in September, 2002. He can be reached by email 

(smetters@wharton.upenn.edu) or by phone (215–898–9811).

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Mr. CHABOT. Thank you, Dr. Smetters. 

Mr. Kogan? 

STATEMENT OF RICHARD KOGAN, SENIOR FELLOW,

CENTER ON BUDGET AND POLICY PRIORITIES 

Mr. KOGAN. Thank you, Mr. Chairman, Mr. Nadler. It’s a pleasure to be back to the House of Representatives, even as an outsider. 

I have 8 points that I’d like to make in my testimony. I’ll try to 

get through them very briefly. To supplement my testimony, however, I’ve attached two reports that the Center on Budget and Policy Priorities issued in 1997 and a series of 11 graphs, which I’ve 

attached. With your permission, Mr. Chairman, I’d like them introduced into the record. 

Mr. CHABOT. Without objection. 

Mr. KOGAN. The graphs and charts bear on many of the statements that the Members and the witnesses——

Mr. SCOTT. Do we have these? 

Mr. NADLER. We have your four pages of testimony, but that’s it. 

Mr. KOGAN. I believe copies of my testimony are in the worst possible place, which is over there, rather than in front of you. 

Mr. CHABOT. We’ll hold your time. We’ll give you an extra however long it takes to pass these out. 

Mr. KOGAN. Thank you. 

Mr. CHABOT. Okay. You can proceed. 

Mr. KOGAN. Thank you, Mr. Chairman. 

First of all, I’d like to mention this amendment is far more restrictive than any rules placed on families, States, counties, or 

businesses. No State, local government, family, or business is required to prohibit borrowing under all circumstances. Every family 

borrows to finance the purchase of a home. That’s what a mortgage 

is. Every State, city, or county borrows to pay for school, road, or 

hospital construction. Growing businesses borrow to finance new 

capital construction. 

Worse yet, this amendment would prohibit dipping into past savings. Under this amendment, this year’s costs must be covered entirely by this year’s income. This would mean that a family in retirement could not draw on its savings but would, rather, have to 

draw on its income in that year. It would mean that a family could 

not draw on its savings to send a child to college. It would mean 

that a business could not use retained earnings from previous 

years to invest and grow. It would mean a State could not use a 

rainy-day fund. This is far too restrictive. 

Second, such a restrictive amendment is poor public policy. The 

Administration is right when it says that during a recession or during a war or during some major national emergency, it would be 

wrong to insist on balancing the budget in the short run. Among 

other things, particularly in a recession, it would kick the economy 

when it was down; it would withdraw purchasing power. Whether 

we withdrew purchasing power by raising taxes or by cutting 

spending, it would push the economy even more into a bad situation. 

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In Graph Number 1, you can see that from 1929 to 1933, when 

we valiantly tried to balance the budget by raising taxes and cutting spending, we created the Great Depression. 

Third, the experience of the last 20 years illustrates that setting 

dollar targets of the outcome, which was what this does—this requires a balanced budget each year—is not as good a method of trying to keep budgetary controls and budgetary restraint as setting 

dollar targets for the cost of legislation. The pay-as-you-go rule said 

that all tax cuts had to be offset, that all entitlement increases had 

to be offset, that appropriations were capped. It did not say what 

the outcome had to be, but by following the pay-as-you-go rule and 

the discretionary caps for 8 years, we also ended up with a balanced budget, something that we did not do under Gramm-Rudman. 

Fourth, every State has a political system in which the Governor 

is exceptionally powerful compared with the legislators. In part, 

this is needed so that Governors can deal with budgets when they 

fall out of balance in the middle of the term. I prefer having the 

House of Representatives and the Senate be powerful, not the 

President. I don’t want this institution to become merely a rubber 

stamp. 

Fifth, it’s possible—and I think this Committee particularly is 

well suited to look at the issue—that a balanced budget constitutional amendment, being a constitutional amendment, has the force 

of law, force of super law. If it is to be meaningful, if it isn’t merely 

to be something that the courts will set aside and say it’s a political 

question or a non-justiciable issue, then it would have to be enforced. If Congress did not waive the balanced budget requirement 

by supermajority, did not raise taxes by majority vote, did not cut 

spending by majority vote, then the courts would have to intervene. 

We have no idea whether they would do this or how they would 

do this, but one of my attachments went through all of the possibilities that I could imagine at the time, for example: a court-ordered surtaxes; court-ordered benefits cuts; court-ordered enactment of tax increases or spending cuts that the President had vetoed; court-ordered enactment of tax increases or benefit cuts that 

Congress had designed but failed to pass; court-ordered invalidation of appropriations bills, entitlement bills, and tax cuts, in reverse chronological order; or maybe contempt citations. We should 

consider that seriously if we want to put a rule, no matter how 

good a rule, into the Constitution. 

Let me sum up quickly. I’m sorry that I’m so slow. 

Sixth, there are wide varieties Congress could use to evade the 

balanced budget amendment if it wanted to—we learned all about 

them during the Gramm-Rudman I and Gramm-Rudman II years: 

offloading Federal programs onto GSEs; timing shifts; contingent 

liabilities; and my particular favorite, unfunded mandates. Ultimately, this bill could be known—if it were enacted, could be 

known as the Unfunded Mandates Act of 2003. 

Seventh, there’s the public policy question. I’ve said that balanced budgets is poor economics under certain circumstances, in 

my opinion. The public policy question suggests and Mr. Smetters’

testimony suggested that in the current circumstances, with the 

overhang of the baby-boomer retirement, we should be running surVerDate Jan 17 2002 08:38 Apr 04, 2003 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6601 G:\WORK\CONST\030603\85491.000 HJUD1 PsN: DOUGA
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pluses. And I agree, were it not for the recession. When we’re out 

of the recession, I think we should be running surpluses in the current situation. But situations change. We don’t always have babyboomer overhangs. We don’t always have a low national private 

savings rate. We should not put into the Constitution an operational rule that might be right for current circumstances but is 

not a permanent matter of law, like the right to free speech. 

And, finally, this public policy discussion and the disagreement 

on this panel and on this Committee illustrates that this is fundamentally a democratic question, not a constitutional question. To 

make it a constitutional question implies that people with some 

public policy viewpoint will have fewer legal rights; they will have 

their votes counted less than other people’s votes. Nowhere in the 

Constitution does that exist, except that Members of Congress are 

subservient to the President when it comes to counting votes because he gets to enact vetoes that is hard for you to override. No 

public policy position in the Constitution is favored over any other 

public policy position. 

[The prepared statement of Mr. Kogan follows:]

PREPARED STATEMENT OF RICHARD KOGAN

The question before us today is whether the Constitution should be amended to 

require that the federal budget be balanced every year. To supplement my testimony, I have attached a report the Center on Budget and Policy Priorities issued 

in 1997, the last time Congress debated a constitutional amendment that would 

have mandated a balanced budget every year. 

First, let me very briefly explain how restrictive the text of the current proposed 

amendment really is. By requiring that each year’s expenditures be covered by that 

year’s income, the amendment would preclude borrowing, even during times of unusual duress, such as wars or recessions; moreover, it would effectively preclude 

saving for the future, because the money saved in the present could not be used to 

cover future costs. 

No state or local government, no family, and no business is required to operate 

under such restrictions. Every family borrows to finance the purchase of a house—

that’s what a mortgage is—and many borrow to finance higher education; every 

state, city, or county borrows to pay for school, road, or hospital construction or 

parkland acquisition; and most growing businesses borrow to finance new capital 

construction or acquisition. 

Moreover, the amendment would prohibit dipping into past savings, since under 

the amendment this year’s costs must be covered entirely by this year’s income. Yet 

most families dip into savings to pay for a child’s college education and certainly 

to cover costs during retirement; every state that ‘‘balances’’ its budget in fact can 

use its rainy day fund to help cover costs during a recession; and businesses often 

use retained earnings from prior years to finance expansions. This amendment 

makes saving for the future pointless because the saved money could never be used: 

it would be unconstitutional to use rainy day funds, or to use the accumulating assets in the Social Security trust fund to help cover the costs of the baby boomers’

retirement. In effect, it would prohibit this generation from building up public savings, or paying down public debt, for the express purpose of providing assets to 

make the burden on future generations lighter. 

Second, such a restrictive amendment is truly inferior economics—it would require the government to reduce consumption during recessions, thus slowing the 

economy even further, throwing more people out of work, and in some cases running 

the risk of turning a recession into a full-blown depression. This Administration is 

exactly right when it says that Congress should not raise taxes during a recession. 

By the same token, Congress should not cut public spending during a recession. Either action takes purchasing power out of the hands of consumers at exactly the 

wrong time. In effect, the amendment would ban automatic stabilizers, such as unemployment compensation. Likewise, the amendment would give the seal of approval to over-stimulating the economy during an inflationary boom, risking an acceleration of inflation that could be seriously destabilizing. 

24

Even though the states operate under much less restrictive rules, the actions 

states are forced to take during the current recession—raising taxes and cutting 

education, health care, social services, and infrastructure—are harming the economy 

and slowing the recovery; this fact makes it doubly important to maintain robust 

automatic stabilizers at the federal level. 

Third, the experience of the last twenty years illustrates that setting targets for 

a budget surplus, or deficit, or balance, is not workable but that limiting the cost 

of legislation works far better. From the mid 1980s through 2000, three Presidents 

and many Congresses gradually worked to undo the damage of the first half of the 

1980s, mostly by taking hard votes but partly by writing statutory rules or rules 

of House and Senate procedure providing guidance that Congress very largely followed. Especially after Gramm-Rudman-Hollings I and II were replaced by the far 

more workable system of appropriations caps and a rule of budget neutrality for tax 

and entitlement legislation—the so-called PAYGO rule—the budget moved from deficit to surplus. The relative failure of GRH I and II is important because those laws, 

like the amendment before us, attempted to set a specific fiscal target for the budget. The relative success of caps and the PAYGO rule illustrates that targeting the 

cost of legislation—rather than the overall level of the surplus or deficit—is a far 

superior road to the desired result. If this subcommittee is truly concerned about 

future deficits, it should work with the Budget and Rules Committees and the Administration to re-impose reasonable appropriations caps and the rule of budget 

neutrality. More importantly, Members should eschew any new tax cuts or entitlement increases, such as a prescription drug benefit, except to the extent that they 

are fully offset. 

Fourth, almost every state has a political system in which the governor is inherently much more powerful than the legislators, most of whom are part-time legislators with other jobs. This is a logical consequence of allowing governors great freedom to implement or not implement elements of the budget, depending on circumstances, given various state balanced-budget requirements. By analogy, this 

amendment could lead to a vast strengthening of presidential powers and a weakening of congressional authority. This worries me; Congress is not very efficient, but 

its very inefficiency was deliberate, to minimize hasty and ill-considered actions. 

This has worked well for a few centuries, and I see no need to fundamentally 

change the balance of power. 

Fifth, it is possible that power won’t be shifted from the Congress to the President, but rather from the Congress and President to the courts. My guess is that 

the courts would find the amendment unenforceable, making this exercise mere 

show. But if the courts believed the Constitution prohibited an unbalanced budget 

except to the extent Congress voted by supermajority to approve it, then the risks 

of this amendment would be profound. We have absolutely no way of knowing what 

a court would do to balance the budget when Congress refused, or more likely, when 

the budget fell out of balance despite Congress’ best efforts. I have attached a paper 

raising many of the legal avenues that can be imagined—court-ordered surtaxes or 

benefit cuts; court-ordered enactment of tax increases or spending cuts that the 

President had vetoed; court-ordered enactment of tax increases or benefit cuts that 

Congress had designed but had been defeated; court-ordered invalidation of appropriations bills, entitlement increases, and tax cuts; or contempt citations. 

Sixth, whether the Courts will enforce the balanced budget amendment or not, 

there are a wide variety of gimmicks Congress can use to evade it. Among these 

are borrowing by another name, e.g. lease-purchase contracts; paying for costs 

through contingent liabilities, e.g. loan guarantees or insurance contracts; timing 

shifts that move costs from the present to the future, e.g. back-loaded IRAs and the 

new so-called ‘‘savings account’’ proposals; off-loading federal programs onto nominally independent ‘‘government-sponsored enterprises’’ such as REFCORP; and the 

perennial favorite, unfunded mandates on states, localities, businesses, and individuals. In fact, if this amendment were enacted, it could ultimately be referred to as 

the Unfunded Mandates Act of 2003. 

Seventh, let us leave aside the constitutional question for the moment and ask 

the public policy question. Should the Federal Government aim to balance its budgets? Clearly not during a recession, as I have said. How about on average over the 

business cycle? Even here, I think that a balanced budget would be the wrong general target. A better target would be to run surpluses, not balance, for the remainder of the decade, in an attempt to pay off much or all of the debt before the baby 

boom generation retires. The purpose, in this case, is to reduce or eliminate future 

federal payments for interest on the debt and thereby allow future tax revenue to 

be used entirely to pay for public benefits and needs, such as Social Security or defense. Because the federal government is a major supporter of people in retirement 

and because there will be a bulge in retirees at the end of the decade, federal costs 

25

will inevitably grow starting in about a decade. If we can reduce federal costs for 

interest at the same time that the federal costs of Social Security and Medicare are 

growing, we can afford part of the increased costs of Social Security and Medicare 

without having to raise taxes. 

Thus, the question is whether we should pay somewhat higher taxes now (when 

I am paying them) in order to pay off the debt, or wait a decade or more to raise 

taxes, when I will be retired but my children will be paying taxes. It seems to me 

only fair that I and my generation be willing to reduce the tax burden on my children and their generation by being willing to pay somewhat higher taxes now so 

that we can reduce or eliminate the debt before we retire. 

In short, if we are discussing budget policy rather than artificial budget rules, we 

happen to be in one of the rare decades in which surpluses are generally a better 

goal than balanced budgets. A surplus doesn’t mean we are collecting ‘‘extra, 

unneeded’’ taxes; it merely means that the taxes we are collecting now will be needed for our future retirement. 

This policy discussion illustrates one reason the constitutional amendment is a 

bad idea: circumstances change over time. During some decades, balance might be 

generally a good goal, but one should also take into account the private saving rate 

and needs of the future. In the particular circumstance we are in, where we can 

predict with certainty that the need for public expenditures will increase in the future compared with current needs, it makes sense for the nation to save for the future by paying down debt. Unlike the right to free speech or the right to a lawyer 

(which can be viewed as a permanent right), the appropriate general target for fiscal 

policy depends on circumstances, so it is inherently wrong to enact any such target 

into the Constitution. 

Finally, a constitutional balanced budget amendment is fundamentally unworthy 

of a democracy. Our Constitution currently allows every public policy question—war 

versus peace, the levels and types of taxes, the purposes and amount of public expenditures, what constitutes a federal crime, whether to admit a new state to the 

Union—to be decided by majority vote. (True, the rights of individual citizens are 

protected against a majority decision to discriminate, and it takes a 2⁄3 vote to override a presidential veto. But these aspects of the Constitution do not favor one set 

of public policy preferences over any other.) Under a constitutional Balanced Budget 

Amendment, citizens with one preference on public policy (let us say, those who 

favor a tax cut or an increase in unemployment benefits during a recession, or merely allowing revenues to fall naturally and the normal unemployment compensation 

law to continue to operate) would have fewer legal rights than citizens with the opposite viewpoints because they would need more votes to win. This is so inherently 

unfair that it should be rejected out of hand. Equal legal rights, including the right 

to have our votes count the same amount as anyone else’s votes, is fundamental.

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Mr. CHABOT. Thank you very much. 

Mr. Beach? 

STATEMENT OF WILLIAM W. BEACH, DIRECTOR, CENTER FOR 

DATA ANALYSIS, JOHN M. OLIN SENIOR FELLOW IN ECONOMICS, THE HERITAGE FOUNDATION 

Mr. BEACH. Mr. Chairman, Congressman Nadler, I’m delighted 

to be here today to join my colleagues on this panel to talk about 

the balanced budget, balanced budget amendment, and urge you to 

do that, no matter whether we have an amendment or not. 

I’m going to summarize three points that are in my written testimony, and my written testimony should contain an attachment— and I hope it does—of a paper by my colleague, Brian Riedl, which 

is central to the written components of my testimony. 

I’d like to talk about three different headings: the first, sort of 

a constitutional principle of what I think really does motivate a republican form of Government when you have balance as an objective, and that is, constitutional debate on priorities. Secondly, I’d 

like to remind the Committee about the really critical statistical 

evidence of where we are right now on spending and on revenues. 

The numbers really do get worse every day, and I think it’s important that we move not only in the appropriations and budget process, but on the constitutional side as well. And, finally, I’d like to 

make one note about the horse and the cart and how important it 

is to keep the health of the horse up if the cart is going to continue 

to get larger. 

I really do think that the 108th Congress can work for the longterm well-being of those who elected it in a number of ways: 

strengthening national defense, providing needed tax relief to keep 

the economy growing and to keep it strong, and enact key reforms 

that affect the country’s neediest citizens. Those are things that 

must be done. But this Congress does have a historic opportunity, 

and that is to live in history as the Congress that enacted or 

passed on to the States for their ratification a balanced budget 

amendment. And there are many reasons why I think this is a crucial thing for us to have. 

The Constitution—the way in which our republican form of Government operates—this message from the outside consultants. The 

way, in my view, our Constitution operates to promote and extend 

republican Government is to have great debates over policy priorities that are pressing in the public’s mind. But one of the problems 

with having great debates now is that the Congress and the Administration, the Federal Government, is able to avoid many policy 

matters by borrowing their way out of a debate. 

Now, at the State level—and many of you have State experience, 

as I do, where we are required to keep the balance in budget—the 

budget in balance—you find that at times the legislature must 

grapple with the differences in priorities because it has no choice 

but to do so. And if it is not done in the legislative body, then the 

Governor imposes choices, which is another way of doing it. 

And so I think from a constitutional health standpoint, something that imposes balance or requires it or motivates it will go to 

the central heart of our republican form of Government, and that 

is that the public can always count on its representatives carefully 

56

debating and vigorously debating the differences in priorities. And 

why is this important? 

Well, right now we have a big problem on the spending side. Let 

me remind you of a few reasons why you should be concerned. 

The outlays of the Federal Government today are slightly more 

than 23 times greater than they were in 1960. Government spending, after adjusting for inflation, has increased nearly five-fold 

since 1960, while the population has grown by a factor of 1.6. Per 

capita Federal spending now stands at $7,600. In 1960, per capita 

Federal spending stood at $510. 

Total publicly held debt in 1960 was $236.8 billion. In 2003, it 

equals $3.9 trillion. And this Congress and the preceding Congress 

and the Congress just before that must bear a great deal of responsibility for these awful numbers. Republicans and Democrats alike 

share this. 

In the last 4 years, Federal spending—that’s Republicans and 

Democrats, the last 4 years, Federal spending has increased by 

$800 billion. The last 4-year period when Federal spending increased by that rate was at the darkest moment of World War II. 

And I think what we’re looking at now in the current budget being 

considered is yet more burden for the horse to carry. So let me sum 

up by talking about the horse. 

The horse, of course, is the general public that produces the revenues, and the cart is the increasing size of Government that you’re 

asking that horse to pull. Now, we’ve been doing a good deal of 

work on what would create a better environment for the economy, 

looking at what the President’s proposed, we’re just about to finish 

work on what Senator Daschle has proposed in S. 414. Both bills 

move the economy to a higher level of activity. And why is that important for this consideration, for this group? 

It’s important because if you don’t move forward on a balanced 

budget, then you must move forward on steps to move the economy 

to a higher level of activity. The President’s bill creates about a 

million jobs per year beginning right away. It drops the unemployment rate throughout the forecast period of the next 10 years. Payroll tax revenues increase significantly during this period, which 

strengthens the trust funds—all of which go to the notion of the 

deficit, all of which go to the notion of debt, and that goes to the 

central focus of what we’re here to talk about, the balancing of the 

budget. 

Thank you very much. 

[The prepared statement of Mr. Beach follows:]

PREPARED STATEMENT OF WILLIAM BEACH

I want to begin my testimony today by thanking this Subcommittee on the Constitution for providing an opportunity for me to testify on behalf of a balanced budget amendment to the U.S. Constitution. The opinions expressed in this testimony 

are mine alone and do not necessarily reflect those of The Heritage Foundation. 

There are many things that the 108th Congress can do for the long-term well 

being of those represented by the Members: among them are strengthen our national and domestic security, provide tax relief that yields a stronger economy, and 

enact needed reforms to key programs that affect the country’s neediest citizens. 

However, this Congress certainly would secure its place in history and fulfill its obligation to govern for the general good if it referred to the states for ratification an 

amendment to the Constitution that requires the federal government to operate 

within a balanced budget. 

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My testimony today is divided among three headings: 1) the constitutional importance of vigorous debate over competing priorities; 2) the statistical evidence that 

supports a rapid movement toward a balanced budget amendment; and 3) the role 

that dynamic revenue estimation plays in the process of achieving annual budget 

balances. 

The place of spending debates in the health of the Constitution. I know that many 

fiscal conservatives view the balanced budget amendment as justified principally on 

financial grounds. It is virtually uncontroversial that governments at all levels 

should practice the spending disciplines of well-run businesses. This practice is especially important at the federal level, if for no other reason than the enormous influence that federal spending has on other governments and the economy generally. 

Spending limitations encourage better accounting controls and auditing processes, 

which assure that the monies allocated to address the priorities of voters are, indeed, well spent. 

However, I believe that a larger, constitutional goal is served by amending the 

constitution to require a balanced budget: representative government works only as 

well as it allows a full airing of its citizens’ divergent views, particularly in open 

debates over competing public policy priorities. Without a way to limit spending, 

such debates are unlikely to occur. 

Suppose an extreme situation in which there exist no limitations on the ability 

of the federal government to spend taxpayers’ funds except the capacity of taxpayers 

to produce revenues. In such a world, no one’s spending goals would go unachieved 

in the short run. There would, as a consequence, be no debate over the direction 

the nation should go in meeting the needs of its elderly citizens, its educational systems, or its national defense. And, without debate and the deep social, economic, 

and policy inquiry such debate engenders, we would likely be unable to sustain our 

republican form of government. 

Of course, such an extreme world cannot exist for long, if for no other reason than 

boundless spending by government inevitably destroys the economy out of which 

revenues flow. The point of this scenario, however, applies equally well to more realistic gradients of the extreme case. The ability of a government to avoid hard decisions about priorities because it can borrow to meet its revenue shortfalls also diminishes debate over competing views of our country’s future and current priorities. 

This borrowing ability may, as well, enable organizations with powerful lobbying capabilities to squeeze millions of dollars in subsidies from Congress and the Administration with the public scrutiny that debate can produce. 

Are there reasons for being concerned? These constitutional considerations should 

be justification enough to adopt a balanced budget amendment, even if reality had 

yet to catch up with the possibilities outlined above. However, the evidence is 

mounting that those fiscal disciplines that may once have protected these vital constitutional processes have yielded utterly to growth in spending that far exceeds required levels. 

Let me highlight a few facts:

• The outlays of the federal government today are slightly more than 23 times 

greater than they were in 1960.

• Government spending after adjusting for inflation has increased by nearly 

five fold since 1960, while the population has grown by a factor of 1.6.

• Per capita federal spending now stands at $7,600. In 1960, per capita federal 

spending stood at $510.

• Per capita share of publicly held federal debt now stands at $13,720. In 1960, 

this share stood at $1,310.

• Total publicly held debt in 1960 was about $236.8 billion. In 2003 it equals 

about $3.88 trillion.

• Worse news on the debt is on the way. By 2020, most of the baby boom generation will be retired and drawing monthly checks from Social Security. By 

2030, the total Medicare enrollment will be more than double the current 

Medicare population. Neither Medicare nor Social Security is expected to survive the onset of the baby boom without massive infusions of additional cash 

or major structural reform. The unfunded liabilities of Social Security alone 

are now in excess of $21 trillion over the next 75 years.

The recent Congresses have shown little will to reverse or even slow this explosion in federal spending. The 107th Congress completed a four-year spending spree 

that exceeds every other four-year period since the height of World War II. Between 

2000 and 2003, federal spending grew by $782 billion. This growth in spending is 

equivalent to $73,000 in household spending, which, again, was exceeded only during the darkest hours of the Second World War. 

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I have attached a policy essay to this testimony by my colleague Brian Riedl, who 

details this nearly unprecedented explosion in outlays. If the spending record of the 

period 1960 through 2000 fails convince Members of Congress that spending growth 

is beyond their collective abilities to control, the past four years should abundantly 

make the case. 

The role of dynamic revenue estimation in the budget process. Exceptionally rapid 

growth in government spending, such as we’ve seen in the last four years, bears 

down heavily on the general economy and, thus, on federal revenue growth. The 

consumption of goods and services by government generally comes at the expense 

of consumption and investment by private companies. This redirection of economic 

resources should be a concern to policy makers because private companies generally 

use identical resources more productively than government. When government uses 

economic resources instead of private firms, the growth of the economy slows below 

its potential, which reduces potential employment and tax revenue growth. 

Members of Congress and the general public do, however, change public policy 

from time to time in order to achieve a specific end, like winning a war or encouraging an expansion of economic activity that call for spending above revenues. When 

the public and the Congress begin considering these policy changes, a better, more 

informed debate will be had if those involved in the decision process are able to see 

estimates of how their proposed changes would affect budget outcomes. 

For reasons well beyond this hearing, Congress has resisted the adoption of dynamic tax and budget analysis in the past. However, the 107th Congress made great 

progress in bringing macroeconomic analysis into the tax policy debate, and a beginning also was made in introducing this analytical discipline into the preparation of 

the annual budget. 

I raise this emerging capability here because it relates to directly to the constitutional and fiscal importance of evaluating competing budget priorities. If the budget 

committees and those other bodies that propose tax policy changes were to use macroeconomic analysis as a routine part of their deliberations, I am confident the Congress would make better decisions between competing budget priorities than they 

do now. 

Let me briefly illustrate how dynamic economic analysis could inform the annual 

debate over the federal budget. The Center for Data Analysis at The Heritage Foundation recently completed an econometric analysis of President Bush’s proposed economic growth plan. This plan contains a number of major changes to current tax 

law, including the end to the double taxation of dividends. We introduced these tax 

law changes into a model of the U.S. economy that is widely used by Fortune 500 

companies and government agencies to study such changes. Here are few of the interesting effects we found that would like stem from adopting the President’s plan:

• Employment would grow by nearly a million jobs per years over the next ten 

years, which adds significantly to the tax base of federal and state governments.

• The drop in the unemployment rate reduces government outlays for unemployed workers at all levels of government.

• Investment grows much more strongly under a tax regime without the double 

taxation of dividends than with such a policy, which expands the growth rate 

of the general economy, thus offsetting some of the deleterious effects of rapidly growing federal spending.

• The payroll tax revenues grow more rapidly with President Bush’s plan than without, thus adding about $60 billion more to the trust funds than currently 

forecasted.

• Most importantly, the forecasts of fiscal doom made by many of the plan’s critics fail to materialize. The additional economic growth produced by the 

plan reduces the ten-year ‘‘cost’’ to about 45 percent of its static amount.

• This economic feedback also reduces the growth of new publicly held debt 

that the plan’s critics expect. Instead of a trillion dollars in new debt, the economic growth components of the plan produce significantly under 50 percent 

of that amount. In fact, the plan supports the creation of $3 in after-tax disposable income for every $1 of new debt, while still reducing all publicly held 

debt by 28 percent between 2004 and 2012.

While this testimony has touched on only a few of the many arguments that can 

be advanced in support of a balanced budget amendment, I trust that the thrust 

of my interest in this constitutional outcome is clear. We need the amendment not 

only to contain the growth in spending (a worthy goal all by itself), but also to protect our constitutional process of vigorous public debate over important policy alternatives. A budget process constrained by a balanced budget amendment and accomVerDate Jan 17 2002 08:38 Apr 04, 2003 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6621 G:\WORK\CONST\030603\85491.000 HJUD1 PsN: DOUGA
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panied by the routine use of standard macroeconomic analysis would be more likely 

to produce the size and quality of government that most Americans desire.


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Mr. CHABOT. Thank you very much. We thank all the witnesses. 

Now the panel members will have 5 minutes to ask questions, and 

I’ll begin with myself. 

Did you want to make your statement at this time? 

Mr. ISTOOK. Mr. Chairman, if I might, I appreciate that. 

Mr. CHABOT. Go ahead, yes. 

Mr. ISTOOK. Thank you, Mr. Chairman. I might add there are a 

couple of comments outside my prepared testimony that I wish to 

make. 

I appreciate, Mr. Chairman, you holding this hearing today. Representative Stenholm and I have reintroduced the balanced budget 

amendment for the U.S. Constitution, along with what currently is 

103 Members of the House. Although, recently we enjoyed 4 years 

of balanced Federal budgets; the results of 9/11, the fight against 

terrorism, and economic challenges have all pushed us back into a 

sea of red ink. Unfortunately, we find that in times of surplus, opponents of the balanced budget say, well, we don’t need an amendment. And in times of deficit, those opponents say, well, we cannot 

afford an amendment. It seems that to some people there is no appropriate time. I believe the American people believe differently. 

Although, borrowing can be justified to protect the country in a 

time of national emergency; deficits should not be acceptable in 

normal times. Unless we first set a goal of balancing the budget 

again, it never will happen. And recent experience, once again, 

proves we need the discipline that a balanced budget amendment 

provides. 

I’m especially happy with the support of the Chairman of the full 

Committee and your support, Mr. Chairman, as the Chairman of 

the Subcommittee. And, of course, it would not be possible today 

to consider this without the hard work done by the long-time leading Democrat on the issue, Congressman Charlie Stenholm of 

Texas. And I want to acknowledge the fine work done by the National Taxpayers Union as well as that of Senator Larry Craig, 

who’s been working on the issue for the last quarter century. 

It is time to set the standard and show America what our goals 

are. It doesn’t matter what side of the aisle you’re on. Some people 

complain about the deficit, and they say that’s why they oppose tax 

relief. Other people complain about the deficit and say that’s why 

they oppose spending. But everyone who complains about the deficit should support the goal of balancing the budget again. It is 

hypocritical to say you oppose the deficit but you don’t support the 

balanced budget amendment. 

With the expenses of the war on terrorism, we will not balance 

the budget in the next year or two. And it will take a couple of 

years for the amendment to be ratified by the States. But the goal 

needs to be set now to balance the budget again. Without a commitment to the goal, it never will be achieved. Our children and 

our grandchildren will pay a heavy price, if we don’t return to a 

balanced budget. Not only would they face the high taxes of big 

Government, but they would bear the extra expense of paying off 

the bills that we run up today. 

This balanced budget amendment proposal, H.J.R. 22, is identical to the language passed by a vote of 300 to 132, in the House 

in 1995, as part of what was called the original Contract with 

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America. In the U.S. Senate in 1997, it failed by one single vote. 

Since then, neither the House nor the Senate have voted on it. Obviously, there are many new faces in Congress, and we now have 

212 House Members who have never been held accountable because they’ve never had to vote on a balanced budget amendment. 

We believe the time has come for every Member of Congress to be 

held accountable by being required to address this issue head on. 

The amendment does include an exemption for times when Congress declares a national emergency, but during peacetime, it 

would require a supermajority of Congress for the Federal Government to operate at a deficit. With that supermajority, it could do 

so. No ordinary law can restrain Congress because Congress has 

the power to remove that safeguard whenever it wishes by a simple 

majority vote. The only real protection against permanent deficit 

spending is constitutional protection. 

In light of the current national emergency, more than ever we 

need this amendment to ensure that deficit spending will end. I’m 

concerned that sometimes we hear what I think are very misleading statistics being tossed around. For example, some people 

will say, well, the Federal deficit is only 3 percent of the gross domestic product, or the projected deficit is only about 3 percent. Mr. 

Chairman, that’s saying that it’s 3 percent of other people’s money. 

The U.S. Government does not own the American economy, nor 

anything that belongs to the American people. That’s akin to a 

business saying that, well, our debt is only 3 percent of our customers’ money. 

Let’s talk about what percentage this is of the United States 

Government and its money, its cash flow. If you look at it in those 

terms, you’ll find that the deficits we’re looking at are approximately 40 percent or more of discretionary spending, 15 percent of 

overall spending. Let’s not diminish or downplay the problem or try 

to understate it by claiming it’s only 3 percent or so of GDP. Let’s 

look at how large it is in terms of the overall Federal budget. It 

is very significant when we look at it in that perspective. 

Mr. Chairman, we are not embarking upon an easy process. But 

as was stated by a former President, some things we choose to do 

not because they are easy but because they are hard. Sometimes, 

if it’s worth doing, it’s a challenge, but it is worth doing. 

Thank you, Mr. Chairman. 

Mr. CHABOT. Thank you, and I recognize myself for 5 minutes. 

I’ll begin with Mr. Beach. 

Mr. Beach, you started out your testimony by saying something 

that I agree with, and that’s that we should balance the budget 

whether or not we have a constitutional amendment requiring us 

to do so. Unfortunately, we have been unable or unwilling to do 

that except for about 3 years in the last 35 years or so, you know, 

because we just don’t show the restraint around this place that we 

ought to. That’s in my view the principal reason; although, there 

are other factors as well—September 11th, the weakening economy, 

et cetera. 

You also stated that there’s a difference, of course, between the 

States right now which are in the budget crunch time and the Federal Government. It’s the same basic issue, but with the States, 

they have in their constitutions—most—that they have to balance 

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the budget. So, they actually have to make the tough decisions. 

And sometimes it’s not pretty, but they have to make those decisions. 

Unfortunately, we kind of get to punt. We get to pay for everything or spend everything, and we’re either printing money or borrowing, whatever—however you want to look at it. And as a result 

of that, we—over the years we’ve built up this huge debt, and my 

recollection is it’s about 16 cents on every dollar that we take from 

the American taxpayer goes just to pay their share of the interest 

on that debt. 

Could you discuss briefly what impact that has on the economy, 

what impact it has on employment, and what does it really do to 

people, taking that particular amount of money out of their pockets 

and paying off the debt? What do they get for it, in other words? 

Mr. BEACH. Well, let’s start with the silver lining, I think, and 

that is that everything that the debt has paid for, the public desires. In that case, they are getting the Government that they desire. 

Now, one of my points early on is this: that because the Congress 

and the Administration are able to borrow a lot of money, we don’t 

really know whether that’s what the public wants when laws are 

enacted and so forth. So, it’s a little unclear whether or not the 

debt which we have has, in fact, purchased the Government that 

the public wants. And I believe that is an open question. 

Does the debt affect the U.S. economy? Well, most certainly it 

does, but in kind of strange ways. When the debt is at the level 

that it’s at right now, which is roughly 34 or 35 percent of gross 

domestic product, which is one way of thinking about it, it probably 

isn’t large enough that it is actually a barrier to entrepreneurship 

and economic growth. It may very well be a weight on entrepreneurship and economic—but not a barrier, like in some countries 

where it’s several hundred times more than the GDP or twice the 

GDP or three times the GDP. 

But here’s what I think happens when you do see debt accumulated by Government, certainly at the Federal level. Current generations begin to think, well, that’s probably going to require one 

of two things in the future: a tax increase or a spending cut. Or 

it’s going to require some kind of changes in public policy that 

produce a stronger economy, so increasing revenues occur. And 

they begin to discount certain kinds of risks. The stock market 

looks at a new business and, well, I can only invest in that business, but sometime in the future tax rates are going to have to go 

up. Or the subsidies or the infrastructure the Government provides 

with this kind of business are going to have to be pulled back. And 

so that business doesn’t get created, and the jobs that come from 

that business don’t get created, and that slows the economy. 

So I’m not at the point where I’m going to say push the red button on our debt. It’s growing, it’s a problem, it should be addressed. 

But to say that it is completely inconsequential is certainly wrong, 

both from a theory standpoint and from the statistics as well. 

Mr. CHABOT. Thank you very much. 

Dr. Berthoud, let me turn to you, if I can. As you know, I’m a 

firm believer in tax cuts, and I know that your organization is as 

well. Could you discuss briefly—and I’ve only got about a minute 

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here, so I’ll have to make it relatively brief—the impact on passing 

a balanced budget amendment requiring us to balance the budget 

and the effect that it would have on our ability to implement tax 

cuts, either in the near term or the long term, the impact that 

those tax cuts would have on the economy and balancing it and 

that whole general thing. 

Mr. BERTHOUD. I think obviously it would make it harder to either enact further tax relief or, on the flip side of the coin, to increase spending. It would require Congress and the President to 

make choices. 

Now, I know certainly in this Subcommittee there are deep differences, as were stated in the opening statements, on what is the 

appropriate level of taxation. Some members, apparently, base it on 

38 percent of income taxes. Some members may want to see that 

at 40 percent, 45, 50 percent. It’s the view of the National Taxpayers Union and I think of you that 38 percent is more than 

enough and, in fact, it should be a lot lower. 

That’s a debate we would have in the context of the balanced 

budget amendment, but it would be a different debate as the debates on spending would be, because anything we did we would 

have to pay for. We would have discussions. 

Bill Beach has a discussion in his testimony on dynamic scoring. 

We can talk about that issue. I think sometimes tax cuts, they 

don’t pay for themselves entirely, but there is some revenue recapture that I think is not being reflected in current models of the 

Joint Tax Committee. 

Mr. CHABOT. Okay. Thank you very much. I appreciate that. 

And we’ll now turn to the gentleman from New York, Mr. Nadler, for 5 minutes. 

Mr. NADLER. Thank you 

Dr. Berthoud, I think I’ll ask you the question first. I think it 

was you and Mr. Beach who said that States have to balance their 

budgets. States have capital budgets. States have to balance their 

expense budgets or their operating budgets, not their capital budgets. They borrow from their capital budget. So does any business 

or so does a family in the sense of a car loan or a home mortgage. 

And, for that matter, States—and Governor Rockefeller and former 

Attorney General Mitchell led the way in inventing moral obligation bonds so the State of New York probably has, I don’t know, 

10 or 20 times as much moral obligation bonds as it does regular 

bonds outstanding. So that’s the difference in the Federal Government in that respect, except that we don’t have a capital budget. 

And when you say you have to balance the budget, you’re saying 

we shouldn’t borrow. Unlike families, corporations, States, local 

governments, we should borrow under no circumstances. 

Does that make economic sense? 

Mr. BERTHOUD. You raise an excellent point, and I think in the 

best of all worlds, I think we could have an exception for a capital 

budget of the Federal Government. Of course, you know, I haven’t 

done the count, but of the 535 Members of the United States House 

and Senate, I am sure a strong majority have issued repeated 

statements about the virtues of balancing the budget, but year in 

and year out we don’t get it done. Here we’re saying, if I could, 

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ment because Congress cannot do it otherwise. I think what I’m 

saying is in an ideal world, I think we should have a capital budget. I think the reality is—— Mr. NADLER. And the expense budget should be balanced, and 

the capital budget should be financing that borrowing. 

Mr. BERTHOUD. I think, unfortunately, the reality is that a capital budget in the context of BBA would create too big a loophole, 

and I think honestly it would be more harm than good because I 

think it would be—and I have seen this in States, that all too often 

capital budgets are abused, and there’s—it creates fiscal—— Mr. NADLER. Let me ask Mr. Kogan to comment on that quickly. 

Mr. KOGAN. It’s a difficult question to answer. Because I oppose 

the amendment, I wouldn’t support this amendment with a capital 

budget——

Mr. NADLER. I don’t support it either, but don’t you think——

Mr. KOGAN. But, no——

Mr. NADLER.—even considering——

Mr. KOGAN. In considering how we budget, I think it is better not 

to treat capital separately from other expenses. I think—and there 

are a couple of reasons for that. 

The first is that capital is not the only type of investment we 

make. We make investments in education. We make investments 

in job training. We make investments in scientific research, civilian 

and military. 

Mr. NADLER. Some people would call—— Mr. KOGAN. Some people would. And the debate over what is a 

true capital expenditure would become a matter of theology rather 

than accounting. Leaving it to the accountants is only useful in a 

tax environment. It is not—it does not necessarily make good public policy. 

Beyond that, certain things that are not capital expenditures as 

such—the expenditures for a standing army, for example—nonetheless, have benefits for the future, not just for the present. 

Mr. NADLER. Let me ask you, Mr. Kogan, one quick question, 

with a quick answer, and then I have another question for the 

other witnesses, and then I’ll finish. We keep hearing the virtues 

of a balanced budget. Now, we have a national debt, and obviously 

if the deficit—if you have a deficit, the national debt goes up; if you 

have a surplus, the national debt goes down. We also have economic growth. 

From an economic point of view, do you really need a balanced 

budget over time, or is it sufficient to have a budget that—a Federal budget arrangement over time such that in combination with 

your economic growth rate your national debt as a percentage of 

GDP is going down, not up; even though you may have—in other 

words, if you have a small deficit this year but the growth rate is 

big enough, your national debt as a percentage of GDP is going 

down. From an economic point of view, isn’t that all you really 

need? 

Mr. KOGAN. Two points. First of all, you are right. During the period from 1946 to 1980, we ran deficits almost every year. I think 

we had surpluses in only 3 or 4 years. Nonetheless, the debt-toGDP ratio dropped from 111 percent of GDP to 25.5 percent of 

GDP because the deficits were small, they were smaller than the 

78

rate of growth of the economy. This is like saying that what I could 

afford to put on my credit card the year I graduated from college, 

which was about $10, is—can grow as I become wealthier, and 

nonetheless, my economic circumstances are a lot better now than 

when—— Mr. NADLER. So that is sufficient from an economic point of view. 

Mr. KOGAN. Yes. But the point that Dr. Smetters made, which 

is that we see in front of us large deficits looming, argues that we 

should be running down the debt now. 

Mr. NADLER. Yes, I understand. And my last question is for Dr. 

Berthoud. The Treasury Secretary, the President, the Majority 

Leader of the House, and Sue Myrick, among others, are telling us 

that the massive deficits we are running are not cause for worry 

and that they, in fact, would prefer a small Government with large 

deficits to a large Government with small—with balanced budgets. 

Are they wrong or are the proponents of this amendment wrong? 

Which is the case? 

Mr. BERTHOUD. I think the context of—I think Dr. Kogan was 

right. First, debt as a share of GDP, and as you rightly mentioned, 

that is one of the most critical variables that we have to look at, 

and I think—— Mr. NADLER. They’re telling us it’s not anymore. 

Mr. BERTHOUD. Well, I think what they’re saying—well, I don’t 

want to speak for them, but what I would say is that the deficits 

we have right now as a share of GDP—certainly, I think we all 

know this—were a lot higher in the 1980’s. And I think as Bill 

Beach said, the levels of deficit and debt as a share of the economy 

that we’re at right now are not particularly troubling. I think the 

goal should be reducing the debt as a share of GDP, but the important thing—and this goes to Dr. Smetters’ testimony—the big elephant in the room is this long-term liability we face with Social Security and Medicare. And in that context, I think we have to think 

about it differently. And—— Mr. NADLER. That’s very different from what this amendment 

says, which is that you should never have any debt in a given year. 

Mr. BERTHOUD. Well, I think what this amendment is trying to 

do is saying that year in and year out there should be fiscal responsibility. And I think in the context—— Mr. NADLER. That’s not what the amendment says. The amendment says no debt, it must be balanced every single year except 

during time of national emergency. 

Mr. CHABOT. The gentleman’s time has expired, but if you’d like 

to respond to the question. 

Mr. BERTHOUD. I was going to say it says no deficit, and——

Mr. NADLER. Except in time of national emergency. 

Mr. BERTHOUD. That’s right. 

Mr. CHABOT. Okay. The gentleman from Virginia, Mr. Scott, is 

recognized for 5 minutes. 

Mr. SCOTT. The gentleman from New York has pointed out that 

in a capital budget, the theology aspect of it is to give you an incentive, instead of building a prison, just lease the prison, and, in fact, 

you can help balance your budget by selling the prison that you already own and then leasing it back. And you have the accounting 

games. 

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We are in a situation now where I think people have an excuse 

for running up the deficits. On September 10th, we had—we 

were—had spent all the surpluses we had run up, on-budget surplus, and we spent up just about all of the Medicare and were 

heading into Social Security. That’s on September 10th. 

Now that September 11th happened, now we have an excuse and 

there has been no limit on what kind of deficits we’re running up. 

And when I made my remarks, I asked people to talk about how 

this amendment would get us into balance. Everybody talked about 

how nice a balanced budget is, but not how this amendment, other 

than the title, would help us get there. 

This title doesn’t require a balanced budget. It just tells you how 

to pass an unbalanced budget. Now, it doesn’t have any tough 

choices in it. You’ve still got to make the tough choices. The gentleman, Dr. Berthoud, said that if the balanced budget magic wand 

is passed, the farm bill would not have passed, the tax cuts would 

have. 

Mr. BERTHOUD. No, I didn’t say that. I said neither might not 

have passed. 

Mr. SCOTT. Well, if, as is likely the case now and knowing how 

we operate, there is no suggestion on the books that we balance the 

budget in 1 year. If you propose a draconian deficit reduction package, draconian to try to get the thing in balance, you’d need 60 

votes rather than a simple majority. My question to you: Are you 

more likely to pass a draconian deficit reduction package with a 60-

vote—a two-thirds requirement, or are you more likely to pass it 

with a simple majority? 

Mr. BERTHOUD. If I could, I think you’re absolutely right, Congressman, that this is not about—this amendment does not say we 

will cut farm subsidies or mass transit subsidies—— Mr. SCOTT. Well, if you—I don’t have much time. 

Mr. BERTHOUD. Sorry. 

Mr. SCOTT. It’s a simple question. Are you more likely to pass a 

draconian deficit reduction package with a two—with a three-fifths 

majority requirement or a simple majority? 

Mr. SMETTERS. No, it’s the override you need a three-fifths. I 

mean, you’re required—— Mr. SCOTT. You are not required. You have—if you’re going to 

pass a deficit reduction package, a draconian deficit reduction 

package—nobody up here is thinking about balancing the budget in 

1 year. My question is: Is the two—is the three-fifths requirement 

to pass a budget more likely to produce a draconian deficit reduction package or a Katy-bar-the-door, everybody, Christmas-tree 

time, you need my vote, you’ve got to add another, for me, aircraft 

carrier. The gentleman from Texas is going to get himself the 

supercollider opened back up. 

This afternoon, we had on the agenda something that was going 

to pass, a little tax relief for soldiers. And you’re looking to find 

friends and you’ve got the tacklebox people with their little goody, 

and you’ve got the gamblers from—overseas gamblers got their little goodies. There are no tough choices. If you need the votes and 

it’s going to pass, are you more likely to pass a draconian deficit 

reduction package or are you more likely—by upping it to 60 percent, more likely to pass a Katy-bar-the-door, everybody get their 

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goodies in it? Does anybody know? If we could just pass the title 

without having to go in detail—— Mr. NADLER. Would the gentleman yield for a moment? 

Mr. SCOTT. I’ll yield. 

Mr. NADLER. I think the fact that the leadership of the House 

just took the armed forces tax relief bill off the floor a few minutes 

ago indicates that by adding 100 percent additions and drives the 

Members to vote for the bill, it wasn’t sufficient. So that may answer your question. 

Mr. SCOTT. Well, the—— Mr. BEACH. Congressman Scott—— Mr. SCOTT. I assume that the military exception that we’re in 

right now would make the whole debate moot, anyway, and get us 

back to try to make the tough decisions. 

A final question, a point I’d like to make, and then I’ll just yield 

to whoever wants to say whatever they want, is that the Social Security situation makes this whole thing ridiculous. In 19—in 2037, 

we are going to be running up a deficit on Social Security in the 

overall range—in the trillion-dollar-a-year range. This amendment—maybe about $800 billion. This amendment would prevent 

us—if we had built up the surplus like we’re supposed to in the 

lockbox, we couldn’t spend out of the lockbox. How are we going 

to—what happens in 2037 if this—if the title passed and it actually 

meant something? 

Mr. BEACH. It is very important for this Congress and the Congresses that follow it to make the changes in Medicare and Social 

Security that will prevent us from having to come up with $43 trillion. But many of us on the outside, and many Members of Congress, too, have very little confidence—— Mr. SCOTT. If you built up the lockbox, you couldn’t spend the 

lockbox. 

Mr. BEACH. Congressman, there isn’t any lockbox, as you know, 

and there never has been. So it’s fictions like that which prevent 

this from happening. 

Now, what I was saying in my testimony is that my experience 

at the State level indicates one thing: that if legislators, Members 

of Congress in this case, are going to come to resolutions of problems, with all of the great difficulties they have when they have 

to put together a majority or two-thirds in order to pass anything, 

sometimes it’s very helpful to have something outside of their deliberations pressing them to a decision. The public used to do that in 

the 19th century and the early 20th century. The public kept it 

there. But it’s not there like it used to be. 

At the State level, on expense budgeting, and sometimes on capital budgeting, it’s the Governor saying if you don’t do this, I’m 

going to veto this legislation, or I’m going to force you to a resolution. 

But because of the constitutional framework that we have and 

the articles which govern the processes and rules of the House, 

without something else there, it’s hard for the Members to come to 

that resolution. 

Mr. SCOTT. How does that something else help? My judgment is 

the 60-vote requirement would hurt, because the 41 Senators that 

stand over on the side and say if you don’t add an aircraft carrier 

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or supercollider or more agriculture bills and everything else, we’re 

not voting for it, which would require everybody else to balance the 

budget overnight. They’re not going to do it. 

Mr. BEACH. Maybe you—maybe a line-item veto would be the 

route to take. Put the power in the hands of the President. But 

that’s—that’s not what you—— Mr. SCOTT. Would this make matters better or worse? 

Mr. BEACH. I think it may help you resolve some of the problems 

that——

Mr. SCOTT. How? 

Mr. BEACH.—you seem unable to resolve. 

Mr. CHABOT. The gentleman’s time’s expired, but the gentleman 

has asked how, so if you’d like to take a shot at how, go right 

ahead. 

Mr. BEACH. I’m not going to take a shot at how. That’s well beyond my testimony. [Laughter.] 

Mr. CHABOT. Okay. All right. Well, this is obviously a very complex area, and I feel very confident that it will pass the House. I 

can’t speak for the Senate. But we appreciate the panel’s testimony 

here this afternoon, and I would just reiterate that I would ask 

unanimous consent that all Members have 5 days to revise and extend their remarks and include extraneous material. 

If there’s no further business to come before the Committee, we 

are adjourned. 

[Whereupon, at 1:14 p.m., the Subcommittee was adjourned.]

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