Testimony before

House Committee on the Judiciary Subcommittee on the Constitution

 

 

 

March 6, 2003

 

 

 

 

William Beach

Director

The Center for Data Analysis 

The Heritage Foundation

 

 

Testimony

 

            I want to begin my testimony today by thanking this Subcommittee on the Constitution for providing an opportunity for me to testify on behalf of a balanced budget amendment to the U.S. Constitution.  The opinions expressed in this testimony are mine alone and do not necessarily reflect those of The Heritage Foundation.

 

There are many things that the 108th Congress can do for the long-term well being of those represented by the Members: among them are strengthen our national and domestic security, provide tax relief that yields a stronger economy, and enact needed reforms to key programs that affect the country’s neediest citizens.  However, this Congress certainly would secure its place in history and fulfill its obligation to govern for the general good if it referred to the states for ratification an amendment to the Constitution that requires the federal government to operate within a balanced budget.

 

            My testimony today is divided among three headings: 1) the constitutional importance of vigorous debate over competing priorities; 2) the statistical evidence that supports a rapid movement toward a balanced budget amendment; and 3) the role that dynamic revenue estimation plays in the process of achieving annual budget balances.

 

            The place of spending debates in the health of the Constitution.  I know that many fiscal conservatives view the balanced budget amendment as justified principally on financial grounds.  It is virtually uncontroversial that governments at all levels should practice the spending disciplines of well-run businesses.  This practice is especially important at the federal level, if for no other reason than the enormous influence that federal spending has on other governments and the economy generally.  Spending limitations encourage better accounting controls and auditing processes, which assure that the monies allocated to address the priorities of voters are, indeed, well spent.

 

            However, I believe that a larger, constitutional goal is served by amending the constitution to require a balanced budget: representative government works only as well as it allows a full airing of its citizens’ divergent views, particularly in open debates over competing public policy priorities.  Without a way to limit spending, such debates are unlikely to occur.

 

            Suppose an extreme situation in which there exist no limitations on the ability of the federal government to spend taxpayers’ funds except the capacity of taxpayers to produce revenues.  In such a world, no one’s spending goals would go unachieved in the short run.  There would, as a consequence, be no debate over the direction the nation should go in meeting the needs of its elderly citizens, its educational systems, or its national defense.  And, without debate and the deep social, economic, and policy inquiry such debate engenders, we would likely be unable to sustain our republican form of government.

 

            Of course, such an extreme world cannot exist for long, if for no other reason than boundless spending by government inevitably destroys the economy out of which revenues flow.  The point of this scenario, however, applies equally well to more realistic gradients of the extreme case.  The ability of a government to avoid hard decisions about priorities because it can borrow to meet its revenue shortfalls also diminishes debate over competing views of our country’s future and current priorities.  This borrowing ability may, as well, enable organizations with powerful lobbying capabilities to squeeze millions of dollars in subsidies from Congress and the Administration with the public scrutiny that debate can produce.     

 

            Are there reasons for being concerned?   These constitutional considerations should be justification enough to adopt a balanced budget amendment, even if reality had yet to catch up with the possibilities outlined above.  However, the evidence is mounting that those fiscal disciplines that may once have protected these vital constitutional processes have yielded utterly to growth in spending that far exceeds required levels. 

 

            Let me highlight a few facts:

 

·        The outlays of the federal government today are slightly more than 23 times greater than they were in 1960.

·        Government spending after adjusting for inflation has increased by nearly five fold since 1960, while the population has grown by a factor of 1.6.

·        Per capita federal spending now stands at $7,600.  In 1960, per capita federal spending stood at $510.

·        Per capita share of publicly held federal debt now stands at $13,720.  In 1960, this share stood at $1,310.

·        Total publicly held debt in 1960 was about $236.8 billion.  In 2003 it equals about $3.88 trillion.

·        Worse news on the debt is on the way.  By 2020, most of the baby boom generation will be retired and drawing monthly checks from Social Security.  By 2030, the total Medicare enrollment will be more than double the current Medicare population.  Neither Medicare nor Social Security is expected to survive the onset of the baby boom without massive infusions of additional cash or major structural reform.  The unfunded liabilities of Social Security alone are now in excess of $21 trillion over the next 75 years.

 

The recent Congresses have shown little will to reverse or even slow this explosion in federal spending.  The 107th Congress completed a four-year spending spree that exceeds every other four-year period since the height of World War II.  Between 2000 and 2003, federal spending grew by $782 billion.  This growth in spending is equivalent to $73,000 in household spending, which, again, was exceeded only during the darkest hours of the Second World War. 

 

I have attached a policy essay to this testimony by my colleague Brian Riedl, who details this nearly unprecedented explosion in outlays.  If the spending record of the period 1960 through 2000 fails convince Members of Congress that spending growth is beyond their collective abilities to control, the past four years should abundantly make the case.

 

The role of dynamic revenue estimation in the budget process.  Exceptionally rapid growth in government spending, such as we’ve seen in the last four years, bears down heavily on the general economy and, thus, on federal revenue growth.  The consumption of goods and services by government generally comes at the expense of consumption and investment by private companies.  This redirection of economic resources should be a concern to policy makers because private companies generally use identical resources more productively than government.  When government uses economic resources instead of private firms, the growth of the economy slows below its potential, which reduces potential employment and tax revenue growth.

 

Members of Congress and the general public do, however, change public policy from time to time in order to achieve a specific end, like winning a war or encouraging an expansion of economic activity that call for spending above revenues.  When the public and the Congress begin considering these policy changes, a better, more informed debate will be had if those involved in the decision process are able to see estimates of how their proposed changes would affect budget outcomes. 

 

For reasons well beyond this hearing, Congress has resisted the adoption of dynamic tax and budget analysis in the past.  However, the 107th Congress made great progress in bringing macroeconomic analysis into the tax policy debate, and a beginning also was made in introducing this analytical discipline into the preparation of the annual budget.

 

I raise this emerging capability here because it relates to directly to the constitutional and fiscal importance of evaluating competing budget priorities.  If the budget committees and those other bodies that propose tax policy changes were to use macroeconomic analysis as a routine part of their deliberations, I am confident the Congress would make better decisions between competing budget priorities than they do now.

 

Let me briefly illustrate how dynamic economic analysis could inform the annual debate over the federal budget.  The Center for Data Analysis at The Heritage Foundation recently completed an econometric analysis of President Bush’s proposed economic growth plan.  This plan contains a number of major changes to current tax law, including the end to the double taxation of dividends.  We introduced these tax law changes into a model of the U.S. economy that is widely used by Fortune 500 companies and government agencies to study such changes.  Here are few of the interesting effects we found that would like stem from adopting the President’s plan:

 

·        Employment would grow by nearly a million jobs per years over the next ten years, which adds significantly to the tax base of federal and state governments.

·        The drop in the unemployment rate reduces government outlays for unemployed workers at all levels of government.

·        Investment grows much more strongly under a tax regime without the double taxation of dividends than with such a policy, which expands the growth rate of the general economy, thus offsetting some of the deleterious effects of rapidly growing federal spending.

·        The payroll tax revenues grow more rapidly with President Bush’s plan than without, thus adding about $60 billion more to the trust funds than currently forecasted.

·        Most importantly, the forecasts of fiscal doom made by many of the plan’s critics fail to materialize.  The additional economic growth produced by the plan reduces the ten-year “cost” to about 45 percent of its static amount. 

·        This economic feedback also reduces the growth of new publicly held debt that the plan’s critics expect.  Instead of a trillion dollars in new debt, the economic growth components of the plan produce significantly under 50 percent of that amount.  In fact, the plan supports the creation of $3 in after-tax disposable income for every $1 of new debt, while still reducing all publicly held debt by 28 percent between 2004 and 2012. 

 

While this testimony has touched on only a few of the many arguments that can be advanced in support of a balanced budget amendment, I trust that the thrust of my interest in this constitutional outcome is clear.  We need the amendment not only to contain the growth in spending (a worthy goal all by itself), but also to protect our constitutional process of vigorous public debate over important policy alternatives.  A budget process constrained by a balanced budget amendment and accompanied by the routine use of standard macroeconomic analysis would be more likely to produce the size and quality of government that most Americans desire.

 

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