Paul Sarbanes

Mr. SARBANES

Mr. SARBANES. Will the Senator yield?

Mr. SARBANES. When the Senator says ``nobody else does it the way the Senator from Utah is suggesting,'' the Senator is referring not only to State and local governments, which borrow in order to fund a capital budget; he is talking about businesses which borrow and about individuals who borrow in order to fund a capital asset; he is talking about all of the other countries in the world. He is absolutely correct.

Mr. SARBANES

Mr. SARBANES. Mr. President, I was deeply saddened to learn of the recent death of a tireless champion of the world's children, James P. Grant. Most of us knew Jim as the deeply committed and energetic Executive Director of UNICEF, where his enthusiasm, his compassion, and his media savvy were legion. For 15 years he refused to take ``no'' for an answer, forcing those more accustomed to the high politics of diplomacy to consider the everyday realities for the youngest and most vulnerable members of the world's population. His child survival revolution can be credited with saving and improving the lives of millions of children who otherwise would have fallen victim to malnutrition, dehydration and easily preventable diseases. While Jim Grant's contributions as UNICEF's Director are unparalleled, it was not only there that he made his mark. In fact he spent his entire lifetime in public service: First with the U.N. Relief and Rehabilitation Administration in China, where he was born, and later at the United States Department of State, the United States Agency for International Development, and the Overseas Development Council. In each of those capacities his concern for those living in poverty and despair lent special significance to his work and distinguished him as an individual. Even as his own health began to fail him, Jim continued his important work at UNICEF. He enlisted the support of everyone from Hollywood superstars to Members of Congress in helping to realize the ambitious goals of the World Summit for Children--cutting child mortality by one- third, halving malnutrition and maternal mortality rates, providing basic education for all children, and reducing or eradicating childhood diseases by the end of this century. In recognition of Jim Grant's outstanding contributions, President Clinton awarded him the Nation's highest civilian honor, the Medal of Freedom, just last summer. Mr. President, I am certain that my colleagues join me in extending my deepest sympathies to Jim's family. He is deeply missed but his life and work shall never be forgotten.

Mr. SARBANES

Mr. SARBANES. Mr. President, since 1926 this Nation has designated February as the month to honor the contributions of African- Americans and their proud heritage, which has so powerfully enriched our land. As we honor the accomplishments of African-American citizens throughout the country, I wanted to bring to the attention of my colleagues legislation introduced today by myself and the distinguished Senator from Virginia, Senator Warner, to recognize and honor Dr. Martin Luther King, Jr. As you know, Dr. King's life was one of extraordinary accomplishments and has had a significant and lasting impact on our Nation's history. The legislation Senator Warner and I have introduced today would recognize these accomplishments by authorizing the Alpha Phi Alpha Fraternity, the oldest African-American fraternity in the United States, to establish a monument to Dr. King on Federal land in the District of Columbia. Identical legislation passed the Senate in the 102d Congress with 60 cosponsors, but was unfortunately not passed by the House of Representatives before adjournment sine die. Pursuant to this proposal, the Alpha Phi Alpha Fraternity of which Dr. King was a member, will coordinate the design and funding of the monument. The bill provides that the monument be established entirely with private contributions at no cost to the Federal Government. The Department of the Interior, in consultation with the National Capital Park and Planning Commission and the Commission on Fine Arts, will select the site and approve the design. Alpha Phi Alpha was founded in 1906 at Cornell University and has hundreds of chapters across the country and many prominent citizens as members, including the late Supreme Court Justice Thurgood Marshall. Alpha Phi Alpha has strongly endorsed the Martin Luther King, Jr. Memorial project and is committing its considerable human resources to the project's development. Since 1955, when in Montgomery, AL, Dr. King became a national hero and an acknowledged leader in the civil rights struggle, until his tragic death in Memphis, TN in 1968, Martin Luther King, Jr. made an extraordinary contribution to the evolving history of our Nation. His courageous stands and unyielding belief in the tenent of nonviolence reawakened our Nation to the injustice and discrimination which continued to exist 100 years after the Emancipation Proclamation and the amendments to the Constitution. A memorial to Dr. King erected in the nation's Capital will provide continuing inspiration to all who visit it, and particularly to the thousands of students and young people who visit Washington, DC every year. While these young people may have no personal memory of the condition of civil rights in America before Dr. King, nor of the struggle in which he was the major figure, they do understand that there is much more that still needs to be done. As Coretta King said so articulately: Young people in particular need nonviolent role models like him. In many ways, the Civil Rights movement was a youth movement. Young people of all races, many of whom were jailed, were involved in the struggle, and some gave their lives for the cause. Yet none of the youth trained by Martin and his associates retaliated in violence, including members of some of the toughest gangs of urban ghettos in cities like Chicago and Birmingham. This was a remarkable achievement. It has never been done before; it has not been duplicated since. It is our hope that the young people who visit this monument will come to understand that it represents not only the enormous contribution of this great leader, but also two very basic principles necessary for the effective functioning of our society. The first is that change, even every fundamental change, is to be achieved through nonviolent means; that this is the path down which we should go as a nation in resolving some of our most difficult problems. The other basic principle is that the reconciliation of the races, the inclusion into the mainstream of American life of all its people, is essential to the fundamental health of our Nation. Mr. President, Martin Luther King, Jr., dedicated his life to achieving equal treatment and enfranchisement for all Americans through nonviolent means. As we continue to celebrate Black History Month, I urge all of my colleagues to join Senator Warner and me in this effort to ensure that the essential principles taught and practiced by Dr. King are never forgotten.

Mr. SARBANES

Mr. SARBANES. Mr. President, in recent weeks much has been written and said about proposals to combine all Federal food assistance programs into a block grant to States. The debate has lead to a close examination of nutrition programs such as WIC and the School Lunch and Breakfast Programs. As a strong supporter of these vital programs, I have been deeply concerned about the potential consequences such action could have on our Nation's most vulnerable--children, pregnant women, and senior citizens. The Census Bureau estimates that more than 37 million Americans live below the poverty line. More distressing, however, is that children continue to be the poorest age group in the country. Over the past 20 years, the number of American children in poverty has increased by more than 37 percent. According to data released by the National Center for Children in Poverty last month, 6 million American children under age 6 were living in poverty in 1992--the highest rate since researchers have been documenting such figures. Mr. President, in my view, we have a responsibility to these children. If our children are to succeed in an increasingly competitive world, efforts to guarantee them access to basic nutrition services must be maintained and expanded. Traditionally, the Federal Government has exhibited a strong commitment to its food assistance programs and many of these programs are among the most successful of all Federal initiatives. Take, for example, the WIC or Women, Infants, and Children Program. WIC provides food vouchers and nutrition education to pregnant women and young children and is expected to support an average of 7.2 million participants at an average monthly cost of $42.38 per person per month in fiscal year 1995. The General Accounting Office estimates that WIC services to pregnant women who gave birth in 1990 cost the Federal Government nearly $296 million, but could save a projected $1.036 billion in Federal, State, local, and private dollars by the year 2008. According to a Harvard University study, every dollar spent on prenatal care through the WIC Program saves as much as $3 in future health care costs. The Department of Agriculture also estimates that every dollar spent on prenatal care through the WIC Program results in a significant Medicaid savings within the first 60 days after birth. The WIC Program not only provides taxpayers one of the greatest returns on their investment, it has also improved the long-term health of millions of American women and children. According to the U.S. Department of Agriculture, since the inception of the WIC Program, low birthweight rates have dropped, the prevalence of anemia in preschool- aged children has declined, and the incidence of stunting has decreased by nearly 65 percent. To date, this important program has served almost 90,000 of more than 210,000 eligibles in my home State of grant to States, the USDA estimates that at least 12 percent of the total funding for the program would be cut, which translates to a loss of approximately $3.6 million for Maryland. I wonder, Mr. President how many people realize that the National School Lunch Program--the oldest of all child nutrition programs-- serves more than 25 million meals daily and boasts a 90-percent participation rate of schools nationwide? The average daily participation rate in Maryland is estimated to be around 374,855 children out of a public school enrollment of 763,274--nearly half of all children enrolled in the Maryland public school system. The Maryland State Department of Education estimates that Maryland would lose more than $22 million in funding for fiscal year 1996 if proposals to block grant nutrition programs were implemented. In addition, block granting nutrition programs would effectively eliminate all uniform national standards for nutrition. These standards, which were strengthened last year through the Better Nutrition and Health for Children Act, appropriately recognized that in providing food assistance to needy children, it is equally important to make certain that the food provided is nutritious. To neglect this important aspect of the debate would be truly irresponsible. A recent editorial in the Baltimore Sun stated that ``By and large, Federal food programs work well. They reach the people who need them, and their existence over the past couple of decades has demonstrably reduced hunger and malnutrition.'' Mr. President, Federal food assistance programs do work well. They achieve their desired goals with a high degree of efficiency and success. In this case, the old adage ``if it's not broke, don't fix it'' rings true.

Mr. SARBANES

Mr. SARBANES. Mr. President, I would like to address the underlying amendment, the basic resolution seeking to amend the Constitution of the United States to put into the Constitution a provision requiring a balanced budget. In my view, amending the Constitution would be economically unwise and constitutionally irresponsible. The amendment would have the very substantial risk of promoting economic instability, retarding economic growth and shifting the basis of our democracy from majority to minority rule. Every time you talk about the problems connected with the implementation of this amendment, things get very fuzzy around here, but I think it is clear that we are inviting fiscal paralysis or court intervention in the conduct of economic policy, or both. I wish to address two concepts that I think are very important in thinking about this amendment to the Constitution to require a balanced budget. One is the argument that is made and drawing a supposed analogy with the States that State and local governments have to balance their budgets; businesses have to balance their budgets; individuals have to balance their budgets; why does not the Federal Government operate under the same constraint? Now, not only is this argument wrong factually--most State and local governments actually run deficits if they use the accounting principles which are used to compute the Federal budget--but this argument also fails to recognize the different responsibilities of the Federal as opposed to the State and local governments with respect to the overall functioning of the economy. The State analogy is superficially attractive. Most States have some form of balanced budget requirement, either statutory or constitutional. But it needs to be clearly understood that many States maintain capital budgets which are not subject to the balancing requirement. Others have developed off-budget funding mechanisms to circumvent the balance requirement, or they use accounting rules which count some borrowing as a form of revenue for the balancing requirement. Official data on the debt incurred by State and local governments gives a very different picture from this assertion that the States run balanced budgets. This chart shows that State and local government debt has been growing year by year. This chart begins in 1972 and runs out here to 1992, the amount of borrowing has increased steadily since 1972.. Now, how can this be? Everyone says State and local governments have to balance their budgets. Yet the amount of State and local debt has been on the upswing. In fact, we had a hearing before the Joint Economic Committee. Two Governors testified that having a balanced budget requirement in their State which they had to adhere to assured them a good credit rating. Of course, the question then is why is a good credit rating relevant to you if you are required to run a balanced budget? They need a good credit rating because they do not run a balanced budget. They have a capital budget which they fund by borrowing. So they acknowledge that the balance requirement for the budget is only on their operating budget and that they make active use of a capital budget for which borrowing is allowed. Now, this proposal before us makes no provision in the Federal accounting regime for a capital budget. It, in effect, would require the Federal Government every year to balance receipts with outlays, and it makes no provision whatever for what in most places is treated as a capital budget. Not only do State and local governments borrow for investment; the same thing is true of businesses and individuals. I could show you a similar chart geared to each of the major corporations in this country which would show that their amount of outstanding debt had increased over the years because they make prudent borrowing in order to enhance the investment capacity of their business and in order to be in a better position to compete. Individuals do not balance their budgets every year. They run huge deficits in the year they buy a home or a car because they borrow in order to fund it. Yet everyone regards it as a prudent and reasonable practice to borrow on a capital debt, the use of which you then have over an extended period of time and to pay back over the lifetime of that capital asset the amount that you have borrowed and the interest charges upon it. Then you get the use of the capital asset now, in the present, and you amortize its use over time. That is how people buy houses. The only people in the country who could afford to buy houses, if they were required to do it under the kind of regime you want to impose on the Federal budget, would be the very wealthy, who are in a position to pay for it out of their flow of income. The overwhelming percentage of people in this country are in no position to do that, and of course, what they do is they borrow. They incur a large deficit in the year they make the purchase, but they set it up with a schedule over time in order to make the repayment. As long as the amount they are borrowing is reasonably related to what their income is and their ability to repay it, follow. So the first point I wish to make is that the very concept of a balanced budget amendment is flawed in the sense that we do not have a capital budget at the Federal level. This requirement would require the Federal Government to fund capital expenditures in the operating budget, which, as I pointed out, is not done by State and local governments, it is not done by businesses, and it is not done by individuals. Now, let me turn from this flaw in terms of not providing for a capital budget to address the fact that it does not allow for the workings of what is called countercyclical fiscal policy. Countercyclical fiscal policy is the effort to ameliorate the ups and downs of the business cycle. The fact is, that in the current budget framework we automatically try to offset the economic downturn. The deficits automatically increase because revenues decrease and the payout of unemployment insurance, food stamps, and other income stabilizers increase. If, in fact, in an economic downturn you try to balance the budget, you would only contribute to the downturn. You would make it worse. You would have deeper cycles of boom and bust. And that, of course, is what occurred throughout a good part of our history. This chart shows the percentage change in our gross national product, beginning in 1890 and coming forward to today. What this chart shows--and I think it is very important--is that after World War II we put into place what we called automatic fiscal stabilizers. We broke out of that pattern of thinking where we tried, when we went into a recession or an economic downturn, to balance the budget, thereby driving the economy even further into downturn. That is what we used to do. And you can see when we tried to balance the budget during recessions we had tremendous fluctuations that took place in the economy. We had these huge swings up and down, and the downturns would go very deep. During the Great Depression negative growth was 15 percent. As those who have read history know, it was an incredible time in this country. People were selling apples on the street corner, grass was growing in the streets, the wind was whistling through deserted homes in the rural areas of our country. We had other downturns where we had 8-, 10-, 12- percent negative growth in the course of the cycle. Now, what has happened in large part as a consequence of these fiscal stabilizers is we have to be able to ameliorate the huge swings of the business cycle. We still get the ups and downs, but they do not have the wild gyrations with all extremely harmful consequences. In fact, since the economic stabilizers have been in place we have rarely gone into a negative growth experience. Most of the fluctuations take place above the negative growth line. So while we get the ups and downs, we still manage to keep it within the positive growth range. A rigid balanced budget requirement would have its most perverse effect during recessions. It would require the deepest spending cuts or tax increases in recessions, when revenues automatically fall far short of expenditures. We have learned over these last 50 years, as this chart demonstrates, to be more flexible with fiscal and monetary policy in responding to business cycle downturns. As a result, we have experienced less violent downturns than before. This chart clearly illustrates the moderation of downturns that have accompanied the more flexible fiscal policy of roughly the last 50 years. Just this week, the Chairperson of the Council of Economic Advisers, Laura Tyson, wrote an op-ed piece entitled ``It's a Recipe for Economic Chaos,'' speaking on the proposal to amend the Constitution to require an annual balance budget. I want just briefly to quote some parts of that article. Mr. President, I ask unanimous consent the full article be printed in the Record at the conclusion of my remarks.

Mr. SARBANES. Ms. Tyson says: Continued progress on reducing the deficit is sound economic policy, but a constitutional amendment requiring annual balance of the federal budget is not. The fallacy in the logic behind the balanced budget amendment begins with the premise that the size of the federal deficit is the result of conscious policy decisions. This is only partly the case. The pace of economic activity also plays an important role in determining the deficit. An economic slowdown automatically depresses tax revenues and increases government spending on such programs as unemployment compensation, food stamps and welfare. Let me just comment on that. As she points out, an economic slowdown automatically brings about an increase in the deficit because you lose tax revenues and you make payments out of the Treasury in terms of income support programs. She goes on to note, then: Such temporary increases in the deficit act as ``automatic stabilizers,'' offsetting some of the reduction in the purchasing power of the private sector and cushioning the economy's slide. Moreover, they do so quickly and automatically, without the need for lengthy debates about the state of the economy and the appropriate policy response. In other words, the economic downturn adjusts automatically. You do not have to wait until you are deep into the trough and you recognize that you are deep in the trough to take some action to do something about it. This proposal has a waiver provision in it which requires an extraordinary 60 votes, which of course raises the question: Would you be able to get that vote even if you were in a difficult circumstance? But even if we assume you can, by the time you are aware and perceive that you are in a difficult circumstance, you are well into your downturn. The downward momentum has begun. The automatic stabilizers check that downward momentum the moment it begins to happen. So they act as a counterbalance. Not completely, because we get the ups and downs. But, as you can see over the experience of the last 50 years, we have markedly improved this performance and we no longer had the very deep dips into negative growth that we used to experience. These deep dips into the negative represent people out on the street, unemployed. These represent the foreclosures on farms and on homes. These represent the bankruptcy of businesses, small and large. That is what these deep dips represent. They are not just lines on a chart. They represent a lack of activity out in the economy. As I have indicated, we have been able to check a good part of this over the last 50 years. As Dr. Tyson goes on to say in her article: A balanced budget amendment would throw the automatic stabilizers into reverse. Congress would be required to raise tax rates or cut spending programs in the face of recession to counteract temporary increases in the deficit. Rather than moderating the normal ups and downs of the business cycle, fiscal policy would be required to aggravate them. Let me just repeat that: Rather than moderating the normal ups and downs of the business cycle, fiscal policy would be required to aggravate them. So Mr. President I hope people will think long and hard before we put ourselves back in a box that will return us to the approach that was taken before World War II. This problem extends back into the 19th century. This chart begins in the late 1800's, where we had these tremendous boom and bust swings in the economy, and we paid a very heavy price for that from time to time. We have a situation now in which these automatic stabilizers work as we go into an economic downturn in order to help ameliorate the volatility of the economy and, as a consequence, we have experienced far less violent downturns in the last 50 years. Finally, I want to just make reference to the assertions that are made that we can simply waive the balanced budget requirement. We are going to waive the Constitution. That is an interesting concept. There are no other provisions in the Constitution that are waivable. No one talks about waiving the Bill of Rights. I do not quite know how you have waivable principles in your Constitution which is, after all, designed for a statement of fundamental principle, not for matter to be waived away. We do not put substantive policy into the Constitution. This is what will be say we are going to provide for a waiver through a three-fifths override provision. The waiver provision says this requirement is not an enduring principle, it is a matter of current judgment. As I say, no other constitutional principle--free speech, individual rights, or equal protection--can be waived by a three-fifths vote. Finally, such a provision would permanently shift the balance of power from majorities to minorities in our society, violating the democratic principles upon which our Government is based. A three- fifths supermajority effectively gives control over fiscal policy to a minority in either House, not what the framers of the Constitution had in mind when they established our democratic form of Government. I just want to quote from James Madison--he is the father of our Constitution--with respect to supermajorities. This proposal before us has a three-fifths requirement, a 60-vote requirement. It is not three-fifths of those present and voting, it is a flat 60-vote requirement. It also has a requirement of 51 votes-- again, not a majority of those present and voting--but of 51. You actually have to produce 51 affirmative votes to invoke other provisions. Madison, in Federalist Papers No. 58, in addressing questions about supermajorities says, and I am now quoting in Federalist No. 58: It has been said that more than a majority ought to have been required for a quorum; and in particular cases, if not in all, more than a majority of a quorum for a decision. That some advantages might have resulted from such a precaution cannot be denied. It might have been an additional shield to some particular interests, and another obstacle generally to hasty impartial measures. But these considerations are outweighed by the inconveniences in the opposite scale. In all cases where justice or the general good might require new laws to be passed, or active measures to be pursued, the fundamental principle of free government would be reversed. It would be no longer the majority that would rule: the power would be transferred to the minority. Were the defensive privilege limited to particular cases, an interested minority might take advantage of it to screen themselves from equitable sacrifices to the general weal, or, in particular emergencies, to extort unreasonable indulgences. That was James Madison's view of requiring extra supermajorities. In fact, the founders of the Constitution were very careful. They had this debate. It was an extended part of the debates in Philadelphia at the Constitutional Convention in the summer of 1787, and again it was the subject of debate in the ratification process across the States. But in those deliberations in Philadelphia, the founders were very careful. They required supermajorities in certain very, very limited instances. Of course, amending the Constitution itself was one of those very limited instances. Impeachment was another. Ratification of treaty was yet another. But I think it is very important to appreciate what Madison's perception was, and it was this perception that was reflected in the basic document. I am not going to discuss today the danger that the courts would come in and intervene to implement this requirement although I think it is a very real danger, and I know Robert Bork and other scholars have written expressing that very concern. We have amended the Constitution only 27 times in the history of the Republic. The first 10 amendments took place almost immediately. Those were the Bill of Rights. So I think it is accurate to say that we have amended it literally 17 times over the life of the Republic, over 205 years. We have been very careful about amending this Constitution. It has been done only in certain, very limited instances, and I think in situations in which we had a very clear view of what the consequences would be. We lowered the voting age. That was a very clear provision. We provided for the direct election of Senators by the people rather than by the States. We changed the term dates for the President and the Congress. But the basic document has held steady throughout the more than 2 centuries of our Republic's history. But putting this balanced budget requirement in the Constitution will undercut countercyclical economic policy, the very policy that has led to this very substantial improvement in economic performance in the post-World War II period. It would burden the Constitution and the courts with issues which should probably be decided by the President and by the Congress. I think we need to be very careful. The courts have in some instances assumed jurisdiction over what I think are essentially executive and legislative policy matters. They have done that with respect to prison systems, for instance, in some States in the country, and there is a very real possibility that under this proposal they would be assuming an extended authority with respect to budget and fiscal decisions, decisions which should properly in my view be decided by the executive and the legislative branches interacting as provided for in the Constitution. In addition, it would shift the principles of our democracy from majority to minority rule. The Constitution is a relatively brief general statement defining the political and civil liberties of our citizens and the defining of the framework of our Government. It does not establish any specific domestic policy or foreign policy or economic policy. We do not put the substance of policy into the Constitution out of a belief that you make substantive policy through the interaction of the Congress and the President. Because of its focus on universal principles, the Constitution has endured for over two centuries despite the dramatic changes in American society. I think it is clear that we should proceed with great caution any time we come up against amending our basic charter. The desire to put a balanced budget amendment into the Constitution is frequently justified in the name of political expediency. It is put forward as a way of supposedly addressing the problem of the deficit. I have voted here on occasions for both spending cuts and tax increases in order to bring about a deficit reduction. And I have a concern about placing on future generations the consumption of the current generation. I have a different view when we talk about capital investment, as I indicated at the outset, because I think a very prudent case can be made as to why it is a sensible and wise economic policy to borrow in order to purchase a capital asset which will then be used over an extended period of time. Enacting a constitutional amendment itself will not bring about that deficit reduction. The deficit reduction will come about through the actual enactment of measures involving expenditures and revenues, as we did in August 1993 when we passed the deficit reduction program which has worked quite well and has brought down the deficit in a very significant and substantial way. I just want to come back to this point of the fluctuation for a moment. It is very important to understand that if the economy starts downward, and we do not try to offset that as we have done by these fiscal stabilizers, the economy will worsen. As it worsens, your deficit grows. If you take more and more extreme measures to try to bring the deficit under control during an economic downturn, you only drive the economy further down which means your deficit only gets larger. So the problem compounds itself. You in effect end up working at counterpurposes. No one wants to go back to this situation that we used to confront before economic stabilizers were in place. But I say to my colleagues, we have to be exceedingly careful. We may be throwing ourselves right back into the difficulties that we confronted earlier in this century and which were particularly marked with the Great Depression. Mr. President, you address the deficit by dealing with real measures to address spending and revenues. We ought not to lock into the Constitution a provision which is faulty in its concept since it lacks a capital budget, which all the State and local governments have, and which is faulty in not providing for a way to address economic downturns and, therefore, it carries the risk with it that the economy would be precipitated into very deep downswings in the economic cycle, and we would pay the price across the country of people out of work, the mortgages on homes being foreclosed, small farmers losing their farms, and small businesses going bankrupt. Exhibit 1 [From the Washington Post, February 7, 1995] It's a Recipe For Economic Chaos (By Laura D'Andrea Tyson) Continued progress on reducing the deficit is sound economic policy, but a constitutional amendment requiring annual balance of the federal budget is not. The fallacy in the logic behind the balanced budget amendment begins with the premise that the size of the federal deficit is the result of conscious policy decisions. This is only partly the case. The pace of economic activity also plays an important role in determining the deficit. An economic slowdown automatically depresses tax revenues and increases government spending on such programs as unemployment compensation, food stamps and welfare. Such temporary increases in the deficit act as ``automatic stabilizers,'' offsetting some of the reduction in the purchasing power of the private sector and cushioning the economy's slide. Moreover, they do so quickly and automatically, without the need for lengthy debates about the state of the economy and the appropriate policy response. By the same token, when the economy strengthens again, the automatic stabilizers work in the other direction: tax revenues rise, spending for unemployment benefits and other social safety net programs falls, and the deficit narrows. A balanced budget amendment would throw the automatic stabilizers into reverse. Congress would be required to raise tax rates or cut spending programs in the face of a recession to counteract temporary increases in the deficit. Rather than moderating the normal ups and downs of the business cycle, fiscal policy would be required to aggravate them. A simple example from recent economic history should serve as a cautionary tale. In fiscal year 1991, the economy's unanticipated slowdown caused actual government spending for unemployment insurance and related items to exceed the budgeted amount by $6 billion, and actual revenues to fall short of the budgeted amount by some $67 billion. In a balanced-budget world, Congress would have been required to offset the resulting shift of more than $70 billion in the deficit by a combination of tax hikes and spending cuts that by themselves would have sharply worsened the economic downturn--resulting in an additional loss of 1\1/4\ percent of GDP and 750,000 jobs. The version of the amendment passed by the House has no special ``escape clause'' for recessions--only the general provision that the budget could be in deficit if three-fifths of both the House and Senate agree. This is a far cry from an automatic stabilizer. It is easy to imagine a well-organized minority in either House of Congress holding this provision hostage to its particular political agenda. In a balanced-budget world--with fiscal policy enjoined to destabilize rather than stabilize the economy--all responsibility for counteracting the economic effects of the business cycle would be placed at the doorstep of the Federal Reserve. The Fed could attempt to meet this increased responsibility by pushing interest rates down more aggressively when the economy softens and raising them more vigorously when it strengthens. But there are several reasons why the Fed would not be able to moderate the ups and downs of the business cycle on its own as well as it can with the help of the automatic fiscal stabilizers. First, monetary policy affects the economy indirectly and with notoriously long lags, making it difficult to time the desired effects with precision. By contrast, the automatic stabilizers of fiscal policy swing into action as soon as the economy begins to slow, often well before the Federal Reserve even recognizes the need for compensating action. Second, the Fed could become handcuffed in the event of a major recession--its scope for action limited by the fact that it can push short-term interest rates no lower than zero, and probably not even that low. By historical standards, the spread between today's short rates of 6 percent and zero leaves uncomfortably little room for maneuver. Between the middle of 1990 and the end of 1992, the Fed reduced the short-term interest rate it controls by a cumulative total of 5\1/4\ percentage points. Even so, the economy sank into a recession from which it has only recently fully recovered--a recession whose severity was moderated by the very automatic stabilizers of fiscal policy the balanced budget amendment would destroy. Third, the more aggressive actions required of the Fed to limit the increase in the variability of output and employment could actually increase the volatility of financial markets--an ironic possibility, given that many of the amendment's proponents may well believe they are promoting financial stability. Finally, a balanced budget amendment would create an automatic and undesirable link between interest rates and fiscal policy. An unanticipated increase in interest rates would boost federal interest expense and thus the deficit. The balanced budget amendments under consideration would require that such an unanticipated increase in the deficit be offset within the fiscal year! In other words, independent monetary policy decisions by the Federal Reserve would require immediate and painful budgetary adjustments. Where would they come from? Not from interest payments and not, with such short notice, from entitlement programs. Rather they would have to come from either a tax increase or from cuts or possible shutdowns in discretionary programs whose funds had not yet been obligated. This is not a sensible way to establish budgetary priorities or maintain the health interaction and independence of monetary and fiscal policy. One of the great discoveries of modern economics is the role that fiscal policy can play in moderating the business cycle. Few if any members of the Senate about to vote on a balanced budget amendment experienced the tragic human costs of the Great Depression, costs made more severe by President Herbert Hoover's well-intentioned but misguided efforts to balance the budget. Unfortunately, the huge deficits inherited from the last decade of fiscal profligacy have rendered discretionary changes in fiscal policy in response to the business cycle all but impossible. Now many of those responsible for the massive run-up in debt during the 1980s are leading the charge to eliminate the automatic stabilizers as well by voting for a balanced budget amendment. Instead of undermining the government's ability to moderate the economy's cyclical fluctuations by passing such an amendment, why not simply make the hard choices and cast the courageous votes required to reduce the deficit--the kind of hard choices and courageous votes delivered by members of the 103rd Congress when they passed the administration's $505 billion deficit reduction package? Mr. GORTON addressed the Chair.

Mr. SARBANES

Mr. SARBANES. I think the assumption of the projection is a no-change scenario, just like an assumption of the GAO study which has been cited was a no change. GAO then, literally in less than 2 years from the time they made this projection, based on a no-change scenario, in effect, says that is now moot or irrelevant because important changes have been made and therefore the dynamics are very different. The biggest problem on the deficit as we look ahead is the health care issue. If you look at the components of where they expect to have a deficit problem, it is in the health care field, and obviously we have a tough problem to deal with in health care. Despite not dealing with it last year, it is my understanding that most Members think something has to be done and it has to be addressed. What will be done and how is another open question. But there is obviously a matter there that has to be addressed. Suppose I said to the Senator, well, we have a capital budget and we are going to have $150 or $200 billion a year in the capital budget-- which would be $1 trillion over 5 years--of capital investment, just like a business would make a capital investment or State and local governments would; would the Senator be upset by that? Would he regard that as being imprudent, as sort of an irrational policy?

Mr. SARBANES. I think I know the answer.

Mr. SARBANES. What are the assumptions of that projection? That nothing is done?

Mr. SARBANES. No. I think we have a problem, but I think we have made progress and I hope we can continue to make progress. I do not think the recourse, as the GAO indicated, is this amendment to the Constitution.

Mr. SARBANES. I am happy to yield. I am more than willing and anxious to explore these matters with my colleagues.

Mr. SARBANES. My answer to that is it depends on your definition of success. I happen to think that the fiscal stabilizers in the post- World War II period have been a success. And I think it is a consequence of a combination of fiscal and monetary policy. It is the same process used by other countries. It is not as though I am putting for an analysis something that is only used by the United States and not used by others. Countries have sought to avoid what they experienced, which of course culminated in the Great Depression in 1930's when we had an absolute collapse with respect to our gross national product. We had a 15-percent drop in gross national product. Franklin Roosevelt came in and he said we are going to balance the budget. Hoover was running deficits in the budget. Everyone said you have to balance the budget. Hoover tried to balance the budget unsuccessfully. The effort to balance the budget, I am asserting here, in those economic circumstances, worsened the economy. Roosevelt came in and said we are going to balance the budget. Then they got in there and they came to realize if they tried to balance the budget in those economic times they were only going to worsen the state of the economy. More people would be out of work. There would be less purchasing power and the spiral would continue to go downward. That is when they moved in a different direction. I am not arguing you should have unrestrained or unlimited deficits. Obviously you need to be very prudent. I am trying to make the point, first on the capital budget, that this amendment requires you to pay out of current income for items that virtually everyone else in the economy pays on a capital basis. In other words they borrow it and pay for it and they regard that as a prudent measure. Second, I do not think the amendment permits the flexibility necessary during economic downturns. It says ``Total outlays for any fiscal year shall not exceed total receipts for that fiscal year,'' unless you use the escape clause. This also means you cannot do anticipatory budgeting. We now have a concept that we build up a surplus in a trust fund and then use it in difficult circumstances. That is what we do with unemployment insurance. So when the economy is running well, the income into the unemployment trust fund is greater than the outgo from the trust fund. We build up a balance in the trust fund. The thinking is that then when we hit a tough economic time in which the payments out will exceed what is flowing in, we will use up the balance in the trust fund that we have built up. This amendment would not allow you to do that because in the outyear, it makes no provision for having outlays in excess of receipts. If everything else was in balance and you sought to pay out of the trust fund, your outlays would be exceeding your receipts; total outlays and total receipts. So you would be in a jam as a consequence. Again people say, ``We are going to waive that. We are going to give the supermajority vote.'' I am not sanguine about that, even if the issue is put to us. But the point I made earlier is that these things happen early on and now we get an automatic response. In the future you would require a discretionary response. I have very serious doubts that it would come early enough and responsively enough to avoid this kind of development. Mr. President, I want to turn to this GAO study that the Senator from Illinois has been citing from time to time. This was a study in which the GAO had four alternative scenarios, one of which was an absolute scare scenario that any rational person would have been in the discussion here as a support for the balanced budget amendment. Prof. Sidney Winter, of the Wharton School of the University of Pennsylvania, Chief Economist of the General Accounting Office, when the 1992 report, ``Budget Policy, Prompt Action Necessary to Avert Long-Term Damage to the Economy'' was prepared for the Congress made the following statement about his views on the balanced budget amendment to the Constitution. A balanced budget amendment is an amendment that would risk converting some future economic downturn from recession to depression. For that reason, a constitutional amendment is the wrong tool for long-term budget discipline. The right tool is the Budget Enforcement Act of 1990, as amended, which is the only tool the Congress really needs. Last year, after my colleague from Illinois quoted the GAO report, we wrote to the GAO asking some questions about the assumptions of this June 1992 report, and also asking about the current long-term deficit outlays. They, in their response last year to me, stated that they developed four scenarios to show the implications of various fiscal policies in dealing with the deficit. These scenarios were projected out to the year 2020. One scenario was doing nothing and allowing the deficit and cumulative debt to grow unchecked. This was a report in June 1992. So this report actually was before the August 1993 deficit reduction program, which was passed by the Congress at the recommendation of the President. So the scenarios were: One, doing nothing and allowing the deficit and cumulative debt to go unchecked. That is the scenario which is constantly cited by my colleague from Illinois. In other words, he takes that scenario and what it said, and says, ``My God, look at this.'' The fact of the matter is that the scenario has already been rendered irrelevant, its assumptions not warranted, by actions taken by the Congress since the report in June of 1992 and up to this time. The second scenario was holding the deficit to 3 percent of gross national product. The third was achieving a balanced budget early in the next century, and maintaining balance thereafter. And the fourth was achieving a balanced budget and then moving in the surplus. The letter then goes on and says: You ask whether our analysis considered the costs or benefits of adopting a balanced budget amendment to the Constitution. It did not. I repeat that. ``It did not.'' The GAO has long supported making the hard programmatic policy choices that would lead the country to a more balanced budget. We have not endorsed the balanced budget amendment to achieve this goal. We then asked them about the current deficit outlook. This is what they said: With regard to your question about the current deficit outlook, it has indeed improved in the 2 years since our 1992 analysis. In the Omnibus Reconciliation Act of 1993, the Congress and the President have taken action that the Congressional Budget Office estimates will reduce the deficit by $433 billion from 1994 through 1998. Actually, the figures are turning out better than that. The CBO now projects the deficit will be 3.1 percent of gross domestic product in 2003, down from its projections of 6.8 percent a year ago. These recent improvements in the deficit obviously would affect the starting point used in our 1992 report, which would in turn alter the outcomes of the four scenarios we outlined years ago. At least through 2004, CBO's projections indicate that we have steered away from the path projected in the no-action scenario. So here is what happened. They projected a no-action scenario path, and on the basis of a no-action scenario path, you had great difficulty. In fact, we took action, and as a consequence of taking action, they were projecting last year the deficit would be down there 6.8 percent of GDP to 3.1 percent of GDP. Obviously, more needs to be done. But the point that needs to be made is this absolute scare scenario that has been cited again and again is no longer applicable because the assumptions upon which it was based no longer hold. In fact, they went on and said in the letter: In the 2 years since we have developed the model, new information has become available that shows somewhat higher productivity, lower Federal interest costs, and higher labor force projections. We believe these changes could work to improve the long-term deficit outlook to some extent. So, Mr. President, I want to underscore that the dynamics of this situation are such that the changes we have made have in fact had a very beneficial effect. The United States now ranks the best among the G-7 industrialized countries, in the ratio of the deficit to its gross product. That was not the case before; that was not the case before the August 1993 legislation. But as a consequence of that and the deficit reduction that has followed the 1993 Omnibus Reconciliation Act, what has happened is the economy has grown, and grown in a very steady and encouraging way. The deficit has come down, and the ratio of the deficit to the gross product has improved markedly, as this letter said--and this letter was in the first part of last year--projected down from what was projected as 6.8 percent to 3.1 percent. So this is all by way of making the point that, first, we are making progress; second, as to the scare scenario that is constantly cited to say we absolutely have to adopt this balanced budget amendment because things are just worsening, worsening, worsening, is in fact wrong, things are improving. There is more that remains to be done. But in my judgment, to try to do them through an amendment to the Constitution is not the way to go. Actually, I agree with the GAO, whose report is being cited as a justification to enact this constitutional amendment. And the GAO itself says: The GAO has long supported making the hard programmatic policy changes that would lead the country to a more balanced budget. We have not endorsed a balanced budget amendment to achieve this goal. There are real problems that are inherent in this amendment. Economic downturns would be exaggerated and become recessions. We make no provision for a capital budget, and therefore, there would be a real question of whether we would be able to do the kind of capital investment for the future strength and productivity of the economy, which everyone in a dynamic society is doing. There is a great concern that this matter would be thrown into court; we may have the judiciary making basic budget decisions which ought to be made by the President and by the Congress. I hope it is not anyone's intention here to shift these issues into the courts. The Constitution does not have particular, substantive policies in it. Those are left to be worked out by the President and the Congress. The Constitution is a framework to define how we reach decisions, and it also guarantees the liberties of our citizens. I think that this amendment has a very substantial risk of promoting instability and retarding economic growth. I very much hope that, upon reflection, perceiving the problems that are connected with locking a matter of this sort into the Constitution, my colleagues will not move to send this proposal to the Senate. (Ms. SNOWE assumed the chair.)

Mr. SARBANES. A budget balance over the business cycle would have more rationality to it. It still does not address the capital budget point.

Mr. SARBANES. I am obviously not going to object to that request from the minority leader. Could I ask the majority leader what is his intention with respect to debating this matter today and next week? Because I could just as easily withdraw from the field and turn it over and then I will make my speech next week sometime.

Mr. SARBANES. Madam President, I yield the floor. Mr. GRAMS addressed the Chair.

Mr. SARBANES. I say to my distinguished friend, I voted for the 1993 campaign. But I bellied up and I voted for a measure that had spending cuts and tax increases in an effort to try to do something real about the deficit. And I think it did do something real about the deficit. We need to do yet more. But I think we need to do it that way and not to pass an amendment to the Constitution of the United States, which then carries with it all of these problems that I have been discussing. I am essentially arguing that some of the concepts contained in this proposal are really counterproductive and will, in effect, be harmful to us. I am very concerned what will happen to investment. And I am very deeply concerned that we are going to go back to a situation in which the economy starts moving this way instead of what has happened in the postwar period. One point on growth in the size of our current economy is $65 billion in goods and services. So if you get a drop like this, interestingly enough, not only are you going to have no growth and rising unemployment, but you are going to have an incredible deficit problem. In the end, you are going to break down because if you keep trying to correct the deficit problem in an economic downturn, you are just going to drive yourself deeper into the hole. That is what happened, as I indicated earlier, first to Hoover and then to Roosevelt, until Roosevelt moved off it in an effort to come out of the depression.

Mr. SARBANES. But what you are doing when you show me those charts is you are assuming no action. Just as in 1992, if you assumed no action, you would have shown a chart of great concern. We took action and, therefore, the situation was improved. Now I am not asserting that the action taken thus far is a complete response to the problem. But I am trying to make the point that these scare scenarios are all premised on sort of doing nothing. We had one before. We did something. We got a very substantial improvement. We need to do even more in order to have further improvement. And the hangup is essentially connected with the rising costs of medical care. If you break out the analysis and say, ``What is it that is growing that is going to create this problem in the future?'' It is the cost of medical care.

Mr. SARBANES. In part. What I would say to my distinguished colleague is you could have shown me a chart far worse than that one if you had done it before August 1993 and the adoption of the deficit reduction package.

Mr. SARBANES. If I could interject, I think the impact of this would not be on fine-tuning. It would be on rough-tuning. In other words, I do not even think you would be able to do rough-tuning, let alone fine- tuning.

Mr. SARBANES. I think that is a good point. Obviously, you would have to have careful definitions because, in fact, the way State governments or private businesses sometimes get into trouble is they put into the capital budget items that ought to be on the operating budget side and paid for through the current flow of income. But the fact that you have that problem at the margin in terms of definition and the possibility of abuse does not detract from the fact that very prudent people, as part of rational decisionmaking, use a capital budget and adopt a concept of paying for the capital budget by borrowing. And depending on the circumstances, it makes sense for the family, it makes sense for the business, it makes sense for State and local government, and it would for the Federal Government.

Mr. SARBANES. Mr. President, the question is simple: How are you going to avoid these boom and bust cycles?

Mr. SARBANES. But, by definition, Mr. President, the extension of the unemployment benefits is a crisis response to the fact that we find ourselves in a fairly serious recession. The fact of the matter is that we start running deficits related to the developing unemployment situation well ahead of the crisis which surrounds extended benefits. The increased payments under the regular unemployment insurance system would provoke the application of this balanced budget amendment. The Senator says if we get in a serious economic situation, surely 60 Members will vote to waive this provision. I do not want to argue whether they will or will not. You have no guarantee that they will and, in fact, a minority may not want to make that adjustment. I will leave that to one side, because the Senator from Illinios is talking about acting once we are ``in the soup,'' so to speak. The way these fiscal stabilizers are established, as soon as the economy begins to weaken, we begin to go out of balance in order to compensate for weak economy. That is the success we have had for the last 50 years in offsetting the business cycles. This chart shows the fluctuations in GDP since 1890. Look at the fluctuations we used to have, the boom and bust cycles we had in this country. We have been able to control this through the use of fiscal stabilizers.

Mr. SARBANES. I say to the Senator, is he talking about extending unemployment benefits?

Mr. SARBANES. Will the Senator yield on that point?