Paul Sarbanes

Mr. SARBANES

Mr. SARBANES. Mr. President, I ask unanimous consent to proceed for just 30 seconds.

Mr. SARBANES

Mr. SARBANES. Mr. President, I want to address one other feature of this proposal for a balanced budget amendment. We do not have a capital budget at the Federal level and therefore the analogy that is drawn, where people say the State and local governments balance their budgets, why does the Federal Government not balance its budget--is completely false. Most States run deficits under the accounting principles used to compute the Federal budget. States have balanced budget requirements but they have a capital budget separate and apart, which they finance by borrowing. We had two Governors who testified that having a balanced budget requirement helped them maintain a good credit rating. The question was then, ``Why do you need a good credit rating if you have to have a balanced budget?'' Of course the answer was they expected to borrow in the future. In fact the Governors acknowledged that their budget balance is required only on their operating budget and that they make active use of a capital budget for which borrowing is permitted. Individuals, of course, borrow. Most people could not buy a home or a car if they had to have an annually balanced budget of the sort that this amendment requires because they would not be able to make a capital investment. It is prudent economics to make wise capital investments in your future and to depreciate the capital asset over its useful life. Let me just turn to the question of the failure of this amendment to distinguish between different types of spending and the impact that those different types of spending would have on fiscal policy. The first is deposit insurance. It must be understood, this amendment requires an annual balance; the outlays and the receipts must be in balance. Between 1988 and 1991, substantial outlays were used to close insolvent thrifts and transfer their assets to the Resolution Trust Corporation. As these assets have been sold in recent years, they have begun to yield a smaller but still sizable stream of net revenue back to the Treasury. This kind of flexible response to a major national financial crisis would have been prevented by the year-by-year lockstep approach of the balanced budget amendment, which makes no account for anticipated future receipts. The amendment actually requires the current outlays for deposit insurance be matched with current spending cuts or tax increases. This would produce a strong downward pressure on the economy because deposit insurance payments do not add to current economic activity. They replace moneys which depositors already considered as in the bank, while the offsetting cuts or taxes would subtract for current activity. There was an interesting article that appeared in this morning's paper entitled, ``The High Cost of a Balanced Budget Amendment.'' Mr. President, I ask unanimous consent that article appear in the Record at the conclusion of my remarks.

Mr. SARBANES. Mr. President, a good deal of the debate thus far has failed to focus on what I regard as one of the most important factors to be considered as we address this amendment to the Constitution--how the balanced budget amendment might affect the economy. What impact will the amendment have on jobs, on incomes, and on the long-term standards of living of the American people. It is my strongly held view that a balanced budget amendment could, under certain economic circumstances, cause significant harm to the economy. Requiring a balanced budget in each and every year, as this proposed amendment requires, regardless of the economic situation, would hamper the ability of the Federal Government to lessen the impact of recessions. A balanced budget amendment would make economic recessions more severe than they might otherwise be. The reason for that is that currently the Federal budget helps to lessen the impact of recessions through what are called automatic stabilizers. These automatic stabilizers allow spending to increase and revenue to fall during times of economic hardship. When the economy goes into a downturn, headed toward a recession, the automatic stabilizers start to work. Spending on Federal Government programs, such as unemployment compensation and food stamps, automatically increase as the economy goes into recession, as more people lose their jobs and become eligible for these programs. In addition, as people earn less money as a result of a recession, they pay less in taxes. The way our system is currently constructed, these changes in spending and taxes occur automatically. These automatic stabilizers reduce the damage done to the American The balanced budget amendment would force the Government to raise taxes and to cut spending in recessions, at just the moment that raising taxes and cutting spending will do the most harm to the economy and aggravate the recession; in other words, it would work directly counter to cushioning or ameliorating the impacts of the recession. This chart shows the percent change in gross domestic product, beginning back in the 1880's and coming forward to the present. Since World War II and the concept of automatic stabilizers we have lessened the severity of economic downturns. As a consequence of the economic downturn there was greater job loss and less revenue into the Treasury. There were also increased expenditures out of the Treasury for unemployment insurance and for medical care and food stamps. The increased expenditures and loss of revenue allow a deficit to take place in an economic downturn and work to support incomes and stimulate the economy. In the post-World War II period, we have allowed that to happen without trying to balance the budget in an economic downturn. Prior to World War II we tried to balance the budget in an economic downturn. President Hoover did it before the Great Depression. Previously, when we tried to do this, the business cycle went through tremendous fluctuations. Prior to economic stabilizers the growth in the economy would go from boom to bust. We used to have very deep valleys of negative growth. In fact, during the Depression, we had 15- percent negative growth. From 1929 to 1933 we had a 30-percent drop in our gross national product, almost a one-third drop in gross national product. So prior to World War II, we had these tremendous fluctuations, and in the postwar period, using the automatic stabilizers, we have been able to effectively eliminate periods of negative growth. We still have fluctuations, but they are much shallower and most of them have taken place above the positive growth line. In fact, Charles Schultze, in testimony he gave concerning the balanced budget amendment said, and I quote him: A balanced budget amendment would be bad economics. Federal revenues automatically fall and expenditures for unemployment compensation rise when recessions occur. The deficit necessarily rises. This budgetary behavior is a very important economic stabilizer. It helps sustain private incomes during recession and thus keeps sales, employment and production better maintained than they otherwise would be. And he goes on to state: The American economy in the postwar years has been far more stable than it was between the Civil War and the Second World War, even if we exclude the Great Depression from the comparison. In the period between the Civil War and the First World War, the American economy spent about half the time in expansion and half in contraction. In the period since 1946, the economy spent 80 percent of the time expanding and only 20 percent contracting. In the years after the Second World War, fluctuations in the American economy around its long-term growth trend were only half as large as they were in the period 1871 to 1914. Many people who have studied the period, credit an important part of the increased economic performance to the automatic stabilizing characteristics of the Federal budget. Under the proposed constitutional amendment, this stabilizing force would be seriously threatened. The first year of a recession would turn an initially balanced budget into deficit, but under the proposed constitutional amendment, the Congress would be required to bring the budget back into balance by large tax increases or spending cuts imposed as the recession was still underway. Of course, to do that would only drive the recession downward and move the economy even deeper, deeper into these valleys. Let me just talk a little bit about how the fiscal stabilizers work in terms of keeping income up during an economic downturn. This chart illustrates how automatic stabilizers work. Between the second quarter of 1990 and the fourth quarter of 1991, real personal income from all sources before taxes and without transfers fell by 2 percent. In other words, we went into an economic slowdown, and personal income began to decline. Transfer payments including unemployment insurance, food stamps, and medical care increase. These payments do not increase incomes up to the level that they were earning, but it gives them a percentage of what they were earning so they are not completely wiped out. They have some income continuing to come in. So as you start this deep decline in wages, families were able to keep up their after-tax income and after-transfer income. So these payments offset or cushioned what was happening as a consequence of the recession. The reason this happens is that Government fiscal policy helps to stabilize incomes. During the 1990-92 recession family incomes before taxes and before any transfer income fell by $70 billion, but their incomes after taxes and with the transfer income rose by $92 billion. So we were able to cushion the economic downturn, and we did it because we got income support from these fiscal stabilizers. You get direct income support through unemployment insurance, and you get a decrease in the tax burden as a consequence of the economic slowdown. Now, had the balanced budget amendment been in effect, these income stabilizers would not have been available, real disposable incomes of American families would have been almost $100 billion lower, and the recession would have been much, much deeper. It is for this reason that an article in the New York Times only a few days ago said, and I quote its heading, ``The Pitfalls of a Balanced Budget, Dismantling a Decades Old System for Softening Recessions.'' The article goes on to say, and I quote it: If the amendment is enacted, the side effects would be huge. A system that has softened recessions since the 1930's would be dismantled. And further on, the article states: The biggest risk is to the Nation's automatic stabilizers which have made recessions less severe than they were in the century before World War II. The stabilizers work this way: When the economy weakens, outlays automatically rise for unemployment pay, food stamps, welfare and Medicaid. Simultaneously, as incomes fall, so do corporate and individual income tax payments. Both elements make more money available for spending, thus helping to pull the economy out of its slump. Now, we would run the risk, without the automatic stabilizers which help to offset the downturn, of putting the economy back in the boom- and-bust cycle which was particularly marked in the late 1800's and through the first half of this century and which prompted the comments made by Charles Schultze with respect to how we have managed to offset the economic downturns since the end of World War II. As he pointed out in his statement, the American economy in the postwar years, post-World War II years, has been far more stable than it was between the Civil War and the Second World War. And as he states, ``Many people who have studied the period credit an important part of the improved economic performance to the automatic stabilizing characteristics of the Federal budget.'' Some of my colleagues have argued, we can waive the amendment with 60 votes. I do not know of constitutional principles that are waivable, but they say we will come along and we will get a 60-vote supermajority and we will waive the requirement of an annual balance in order to address the recessionary situation. The difficulty with this is that the automatic stabilizers work automatically, and they take effect immediately. The stabilizers, which prevent these deep fluctuations, begin as soon as the economy softens. They begin before the economic downturn is generally recognized. Various votes have been cited in the Chamber by others who say, we took a vote and extended the unemployment insurance, and this vote passed by a large majority, so clearly if we were into difficulties, we will get the majorities necessary in order to waive the balanced budget amendment and run the deficit to offset the recession. The first point I wish to make is that we have not always gotten those votes for the extension of unemployment insurance. In the 1982 recession, for example, there was a vote that failed to get the 60-vote requirement. So it is not accurate to say that whenever the and particularly not responded in a timely fashion. Second, those votes that people cite are votes for a further extension of unemployment insurance beyond what the basic program provides by law. But the application of the fiscal stabilizers begins with the use of the basic program. There is no vote taken here to institute the basic program. The basic program begins automatically as the economy slows down, and we rely upon that basic program to cushion the economic downturn. If the economic downturn is severe, there is a necessity to extend the basic program. On that extension, it has on occasion been approved by large votes and on other occasions not so approved. So it is not at all clear that the vote necessary to waive the amendment would be forthcoming, and in any event it is crystal clear that the vote comes very late in the day after we have already started on the downward slope. Therefore, our ability to check that downward movement to avoid these kinds of fluctuations will be markedly limited under the balanced budget amendment. We are inviting the prospect of going from these fluctuations over the business cycle without the deep moves into negative growth back to the very fluctuations that marked the economy in the century before the post-World War II period. This matter may seem somewhat far removed because we have not had a great depression for a long, long time. But I simply want to underscore that what these deep plunges into negative growth represent very severe unemployment, the likes of which we have not seen in the post World War II period: Very extensive business failures--bankruptcies, farm foreclosures. So we would be crippling our ability to address economic downturns. Laura Tyson, when she was the chair of the President's Council of Economic Advisers stated in an article entitled, ``It's a Recipe For Economic Chaos'': 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. * * * * * 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. That is exactly what used to happen when we experienced the boom and bust cycles prior to World War II, and when we talked about the panics, the great panic of 1893, and 1922, and 1929. Mr. President, I ask unanimous consent that the article by Laura Tyson be printed in the Record at the conclusion of my remarks.

Mr. SARBANES. Yes.

Mr. SARBANES. Mr. President, I just very quickly want to address the argument that was advanced by the chairman of the Judiciary Committee in opposition to Senator Byrd's amendments that are pending at the desk dealing with the supermajorities. In that statement, he asserted as an argument against Senator Byrd's contention that these supermajority requirements here were running counter to the prevailing theme of the Constitution that a majority ought to prevail, the fact that there were some supermajority requirements put in the Constitution by the Founding Fathers, for example, amending the Constitution or overriding a veto. I wish to make the point that the very Founding Fathers who put those supermajorities into the Constitution considered at the time whether supermajorities ought to be required in order to make decisions, and they rejected that concept. So they in effect considered the very issue that is before us in this regard and rejected the notion of supermajorities. So they specifically weighed that question at a time when they did include some supermajorities in very special instances. Obviously, amending the document is a very special instance, and the veto is an essential part of the checks and balances. I cite the quote of James Madison in Federalist Paper 58 in which he rejects the notion of the supermajorities in order to reach decisions and says in fact in the course of that quote, and I will include all of it in the Record, ``It would no longer be the majority that would rule. The power would be transferred to the minority.'' And he spoke, of course, against that proposition.

Mr. SARBANES. Mr. President, this editorial addresses this point of the automatic stabilizers and our ability to avoid these very deep and severe economic downward plunges. I quote the editorial: When the economy slows, tax revenues fall off and spending on unemployment insurance and food stamps rises. The automatic rise in the deficit by triggering spending serves to mitigate the slowdowns, but under the proposed amendment Congress could easily turn a $1 million downturn into something worse. Unless a three-fifths supermajority saves the day, Congress would have to raise taxes and cut spending in a slow economy, the opposite of responsible stewardship. Take another unintended consequence. When savings and loans went bankrupt during the 1980's, the Federal Government bailed out the depositors with borrowed money, thereby preventing a banking panic. But under the proposed amendment the government could not react instantly unless a supermajority in Congress approved. Before people start saying we could get a supermajority vote to waive the amendment, let me just remind them of the extremely close votes that we had here on the floor of the Senate with respect to providing the funds to cover the closing out of the failed S&L's. Mr. President, I regard the vote coming tomorrow as a critical vote for a number of reasons, but in particular because I am extremely apprehensive that by eliminating our ability to conduct a rational fiscal policy to offset economic downturns, we will again plunge our economy into the severe up and down boom and bust cycles which we experienced consistently through our history. This is not hypothetical. This is not conjecture. This is what happened. This chart only shows GDP back to the 1880's, but we could have taken it back farther, and it would have shown the same severe up and down fluctuations. We have been able to moderate those movements of the business cycle during the post-World War II period. People have become accustomed to the more moderate business cycle. Many simply assume that somehow the business cycle will continue as it were. But the business cycle remains with us. As the ups and downs prior to World War II show, we have succeeded in ameliorating the business cycle, cushioning it as it begins a downward path. So that we have avoided the very deep plunges that we previously had experienced. These deep plunges represent economic disaster for the country. They represent unemployment, business bankruptcies, and farm foreclosures, the like of which we have not seen in the post-World War II period. We almost seem to take it for granted that these major declines will not occur. I am extremely apprehensive that the balanced budget amendment will take us back to these days. I wanted to come tonight to sound this warning as to the potential impact of this balanced budget amendment and how it might affect our economy, how it might impact on jobs, on incomes, on the long-term standards of living of the American people, how it could cause significant harm to the economy because it would not allow us to follow policies which would avoid bringing economic slowdown into recession and recession into depression. Mr. President, I yield the floor. Exhibit 1 [From the Washington Post, Feb. 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 an 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 requires 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 amendment 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 a sensible way to establish budgetary priorities or maintain the healthy 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. SARBANES. It is stated there: Advocates of the Balanced Budget Amendment to the Constitution do not intend to jeopardize the life savings of America's families or threaten the stability of the nation's banks. As written, however, the amendment could do just that. What happens now is, as soon as you encounter a problem, the deposit insurance fund covers those deposits. But in order to do that, your outlays have to exceed your receipts in the year in which you are making that coverage. Insurance claims are automatically paid as needed, regardless, under the deficit. Under the amendment, if deposit insurance payment would cause a deficit, might not those payments be prohibited? During a severe economic downturn, the risk of bank failure is greatest. An economic downturn also produces (or exacerbates) federal budget deficits, as tax revenues decline and spending for programs such as unemployment compensation increases. At such a time, the government would lack the extra revenues it could need to cover the large costs of rescuing depositors and the banking system. Under current law, deposit insurance claims are automatically paid as needed, regardless of the deficit. Under amendment, if deposit insurance payments would cause a deficit, might not those payments be prohibited? So it is a very important question as we consider the amendment before us. Furthermore, I have difficulty in understanding under the amendment how, with respect to both Social Security and unemployment compensation, we would be able to use the balances that we build up in those trust funds in order to cover future years? How would we be able to expend those balances since by definition to do so your outlays would be exceeding your receipts in that particular fiscal year. We regard that as wise policy. We build up these surpluses in the instance of the Social Security System in anticipation of retirement of the baby boom generation, and with the unemployment system we build them up during better economic times in order to pay benefits during recessions. the baby boomers retire or when the next recession hits since you would have an excess of outlays over revenues in the Social Security trust fund with respect to Social Security and in the unemployment insurance trust fund with respect to unemployment insurance? So this requirement of an annual balance between outlays and receipts fundamentally undermines the economic prudence associated with anticipatory budget. This is budgeting which we have done consistently, and I think wisely. We build up the funds in the trust fund and spend them during difficult times by anticipating the future expenditures. Mr. President, the New York Times today in an editorial entitled ``Unbalanced Amendment'' addresses this point. I ask unanimous consent that the editorial be printed in the Record at the conclusion of my remarks.

Mr. SARBANES

Mr. SARBANES. Mr. President, on behalf of Senator Byrd, I ask unanimous consent that the Byrd amendments be voted in the following sequence: amendment No. 252, amendment No. 254, amendment No. 255, amendment No. 253, and amendment No. 258; further, that amendment No. 289 be withdrawn.

Mr. SARBANES

Mr. SARBANES. The distinguished Senator from West Virginia is correct. We would be back into these up and down cycles. As Charles Schultze said in his quote, which I think is very important: In the period between the Civil War and the First World War, the American economy spent about half the time in expansion and half in contraction. In the period since 1946, the economy spent 80 percent of the time expanding and only 20 percent contracting. When it did contract, it avoided going into these very deep plunges which used to occur. We used to call those ``panics,'' ``busts.'' The economy was devastated. You would have the panic of 1893 or the panic of 1922, and so forth. And we have avoided that in the post-World War II period. We have had some ups and downs; we have what we call recessions. We have not had a depression. We have managed to avoid that. Let me just read what Alice Rivlin had to say today. She is a very thoughtful woman, and those who know her realize that she is what is called a ``deficit hawk.'' She has been anxious to get the deficit down, has worked hard to get the deficit down. Today at a news conference she made the following statement: This discussion is not about whether the budget should be balanced, on the average. It is about whether we should write into the Constitution that the budget should be balanced every year. No one can fault the Clinton administration for not being serious about deficit reduction; we believe the deficit is too high, that it must come down. We have brought it down a lot; we want to bring it down more. But we do not believe that we should write a requirement for balance every year into the Constitution. The real problem with doing that is that it would make swings in the economy bigger. The Federal deficit has acted as a cushion that dampen recessions, make them less wide, less bad for people. When the economy slows down, two things happen. One is, there are more people who are eligible for unemployment insurance and food stamps and the kinds of things that help people when they are in trouble. So expenditures for those things go up. More importantly, when people earn less and they lose their jobs, they don't pay as much income tax, so the Federal revenues go down. With spending going up and revenues going down a lot in the beginning of a recession, what you find is a deficit widening--automatically; it just happens. And automatically, it offsets the horrendous effects of that recession. Now, what would happen if you had to counteract that effect? The Constitution would say, unless you had a supermajority to override it, that you would have to do one of two things. You would have to cut spending to correct that deficit, and people would have less income, . . . or you would have to raise taxes, which would mean people would have less income. So the recession gets worse. We would have bigger swings in the economy, a deeper recession. Now, that's not just a theory, you can really see it. You can see it in what has happened to recessions over the last couple of decades. If you look back in our history, the economy went up and down by huge swings. In the period, especially the period since World War II when these automatic stabilizers have been in effect . . . we've still had recessions, but we have had much smaller ones than we otherwise would have had. If we pass a balanced budget amendment to the Constitution-- And I say to the distinguished Senator from West Virginia this is exactly to his point. If we pass a balanced budget amendment to the Constitution, we are saying we want to go back to those days when the economy had huge swings, and many more people were out of work in a recession than are out of work in modern recessions. lot of attention in this debate. It is very clear that by having these automatic stabilizers in the budget, we have been able to avoid very dire economic times. This amendment would preclude the automatic response which now takes place and which begins to happen before people even begin to recognize that the economy may be in trouble. As soon as the economy starts experiencing some trouble, this cushioning effect automatically starts happening. It is asserted by proponents of the amendment that sixty votes to waive its provisions would be obtained. 60 votes. Maybe, maybe not. I daresay, in any event, you will not come anywhere close to getting them until it is manifest that the economy is in difficulty, namely until we have moved down the downward curve a considerable part of the way. And at that time, of course, you are really playing catch up. You are trying to pull back this downward momentum instead of having offset it right in the beginning. Now, I want to underscore these deep downward lines, on this chart. You say, well, this is negative growth, this is GDP taking a nosedive. People say, ``Well, what does all that mean?'' What it means in real human terms, what these deep plunges in growth to negative levels of 5, 10 percent, in the Great Depression even 15 percent, literally means is millions unemployed; it means small business bankruptcies the likes of which we have not seen in roughly the last 60 years; it means farm foreclosures. Now, these are real life problems, and we run an incredible risk with the proposal that is before us of going back to that kind of business cycle. As the New York Times article said: If the amendment is enacted, the side effect would be huge: a system that has softened recessions since the 1930's would be dismantled. The problem is that the balanced budget amendment is a heavy-handed solution and risky. The biggest risk is to the Nation's automatic stabilizers which have made recessions less severe than they were in the century before World War II. The stabilizers, an outgrowth of Keynesian economics, work this way: When the economy weakens, outlays automatically rise for unemployment pay, food stamps, welfare, and Medicaid. Simultaneously, as incomes fall, so do corporate and individual income tax payments. Both elements make more money available for spending, thus helping to pull the economy out of its slump. Under the balanced budget amendment, Congress and the administration would be required to get the budget quickly back into balance through spending cuts, higher tax rates, or a combination of the two, perhaps even in the midst of a recession. The Government would become almost inevitably a destabilizer of the economy, rather than a stabilizer. Now, in economic terms that is the real concern. I have spoken earlier about the fact that this amendment does not distinguish between a capital budget and an operating budget, and the serious implications of that in economic terms and with respect to investing in our future. But what I just wanted to come to the floor and address this evening at the close of the day--since some question was raised earlier about whether policy had worked to counteract the economic cycle--was this very graphic description, and these comments which I have quoted by some very able people. I think this observation of Charles Schultze, I just want to quote it again: The American economy in the postwar years has been far more stable than it was between the Civil War and the Second World War, even if we exclude the Great Depression from the comparison. In the period between the Civil War and the First World War, the American economy spent about half the time in expansion and half in contraction. In the period since 1946 the economy spent 80 percent of the time expanding and only 20 percent contracting. Many people have studied the period and credit an important part of the improved economic performance to the automatic stabilizing characteristics of the Federal budget. Mr. President, I do not want to go back to the kinds of fluctuations in the economy we experienced in the pre-World War II period, and that is one of the reasons that I oppose the balanced budget amendment and very much hope it will be defeated. Mr. President, I yield the floor. 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 slow-down 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 fall, 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 down- turn--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 a sensible way to establish budgetary priorities or maintain the healthy 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 stabilizer 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 103d Congress when they passed the administration's $505 billion deficit reduction package?

Mr. SARBANES. That is right. You go into a downturn, and instead of having these automatic stabilizers to counteract that, the roller coaster would start down and you would simply be intensifying it. People have to understand, what these downward lines mean, this negative growth means millions of people unemployed. This means small businesses going into bankruptcy. What these lines mean, in every instance in which these occurred, if you went back and looked at what was happening in the economy, there was massive economic dislocation: People losing their jobs, businesses going into bankruptcy, farms being foreclosed. We have not experienced that in recent times and, as a consequence, people begin to take it for granted. But it is not inevitable. It must be understood, one of the reasons it has not happened is because we have had a counteracting policy to prevent these deep declines from taking place.

Mr. SARBANES. It is entitled ``It's a Recipe for Economic Chaos.'' Continued progress on reducing the deficit is sound economic policy, but a constitutional amendment requiring annual balance of the Federal budget is not. Let me repeat that because I agree very strongly with it. Continued progress on reducing the deficit is sound economic policy, but a constitutional amendment requiring annual balance of the Federal budget is not. 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 opposite direction. Tax revenues rise, spending for unemployment benefits and other social safety net programs falls, and the deficit narrows. Now, the marked diminution of the fluctuations in the economy shown on this chart in the post-World War II period reflects the automatic workings of these stabilizers through the business cycle. It demonstrates the benefit we have derived from the application of these automatic stabilizers in the post-World War II period. This is a dramatic illustration of the advantages of having broken out of the thinking that said we had to balance the budget every year and, therefore, led to efforts to balance it at a time of economic downturn which only intensifies the problem. Ms. Tyson goes on to say: 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. Which is exactly what had been happening in the past, and we now have managed to avoid.

Mr. SARBANES. Mr. President, I would like to speak for probably 5 to 10 minutes. There were some points made earlier in the day I would like to respond to. Mr. President, I thank the Senator from Utah for his courtesies. Mr. President, I want to address the point about the danger that the balanced budget amendment might well do to our economy in time of an economic downturn. I think this point very much needs to be emphasized. In fact, there was an article in the New York Times only a day or two ago that was headed, ``The Pitfalls of a Balanced Budget, Dismantling a Decades-Old System for Softening Recessions.'' In the course of that article it is stated ``If the amendment is enacted, the side effect would be huge. A system that has softened recessions since the 1930's would be dismantled.'' Now, I want to just point to this chart and then I want to quote a couple of highly respected economic thinkers in our country. What this chart shows is the change in real GDP beginning back in the late 1800's and coming forward until today. What this chart shows is there were tremendous fluctuations in the economy until the post-World War II period. The economy would, in the late 1800's and the first half of this century, go, as one can easily see, up and down like a roller coaster, often going very deeply into a negative growth situation. These are the boom and bust cycles that those who have read American history are familiar with. These were the panics. What happened is, after the Great Depression, as a consequence of the Great Depression, we began to change our thinking and to develop what are called automatic stabilizers. I will elaborate on that in a moment as to what that means. But the consequence of doing that was to markedly change the depth of the business cycle. As we can see, since World War II, although we continue to have fluctuations in the economy, we no longer have the very deep plunges into very significant negative growth. Now, Charles Schultze, whom all of us know and who is a highly respected economist, stated a couple of years ago in testifying about the then-balanced budget amendment proposal that was before the Congress: A Balanced Budget Amendment Would Be Bad Economics. Federal revenues automatically fall and expenditures for unemployment compensation rise when recessions occur. The deficit necessarily rises. This budgetary behavior is a very important economic stabilizer. It helps sustain private incomes during recessions and thus keep sales, employment, and production better maintained than they otherwise would be. Now, I just want to comment on this. It is very important to understand that, as we go into a recession, we automatically start running a deficit because we lose tax revenues. People have lost their jobs. They are unemployed. So we have less revenues coming in. And we start making payments out of the Treasury--unemployment benefits, food stamps, medical care--and the combination of that means that the deficit grows, but that helps to offset the downward momentum. Now, what we used to do in the old days, we would try to balance the budget in that circumstance when the economy was going soft, we would try to balance the budget and, of course, that would only drive the economy even further down. So, as Mr. Schultze stated and I just repeat it: Federal revenues automatically fall and expenditures for unemployment compensation rise when recessions occur. The deficit necessarily rises. This budgetary behavior is a very important economic stabilizer. It helps sustain private incomes during recessions and, thus, keep sales, employment and production better maintained than they otherwise would be. And he goes on to say: The American economy in the postwar years has been far more stable than it was between the Civil War and the Second World War, even if we exclude the Great Depression from the comparison. Now this is exactly what this chart shows, although it does not go back quite as far as the Civil War. But clearly what this chart demonstrates, as Mr. Schultze states, is that the American economy in the postwar years has been far more stable than it was between the Civil War and the Second World War. You can see the tremendous fluctuations we used to have in the economy as compared to what has occurred since World War II. Mr. Schultze goes on to say: In the period between the Civil War and the First World War, the American economy spent about half the time in expansion and half in contraction. In the period since 1946, the economy spent 80 percent of the time expanding and only 20 percent contracting. In the years after the Second World War, fluctuations in the American economy around its long- term growth trend were only half as large as they were in the period 1871 to 1914. Many people who have studied the period credit an important part of the improved economic performance to the automatic stabilizing characteristics of the Federal budget. Under the constitutional amendment proposed in H.J.Res. 268-- Which was the proposal at the time, the counterpart to what is before us now-- this stabilizing force would be seriously threatened. The first year of a recession would turn an initially balanced budget into constitutional amendment, Congress would be required to bring a budget for the next year back into balance by large tax increases or spending imposed as the recession was still underway. Of course, imposing those tax increases or spending cuts, in order to eliminate the deficit which the onset of the recession had brought about would, of course, only make the recession worse. They would drive the economy even further down, as these tremendous negative growth periods which occurred in the first part of this century clearly indicate. This is not a desirable economic performance, and the automatic stabilizers, which we have run in the postwar period, have enabled us to avoid that. While we have had ups and downs in the economy, they occur almost entirely in the positive growth area. We do not have the deep plunges into negative growth which marked economic performance in the first part of this century and, indeed, ever since the economy became, as it were, a complicated, complex modern economy. So if we had gone back to the Civil War, we would have had these movements up and down as well. Laura Tyson, in an article in the Washington Post--and I ask unanimous consent that that article be printed in the Record at the end of my remarks.

Mr. SARBANES. Certainly.

Mr. SARBANES

Mr. SARBANES. Mr. President, I rise today to add my voice to those who have already spoken in recognition of February as Black History Month. Since 1926 this nation has designated February as the month in which we honor the achievements and contributions of African- Americans to our history, our culture, and our future. One could also say that February is the month in which we honor our Nation's unsung heroes--from the African-American soldiers who have often received no acknowledgment for fighting in the American Revolution to the African- American poets and authors often excluded from literary anthologies. The history of African-Americans is the history of what this country has come to mean to so many people around the world. It is the history of possibilities, of dreams, and of the equality of all human beings. It is the story of insurmountable odds overcome and of challenges yet to be faced. Mr. President, my own State of Maryland has been blessed to be the birthplace and home of countless outstanding African-Americans. Maryland was a bedrock of the Underground Railroad which helped many African-Americans find their way out of slavery to freedom. In fact, Harriet Tubman, the African-American woman credited with leading more than 300 men, women, and children to freedom on the Underground Railroad was a Marylander. The history of Maryland is replete with the contributions of African-Americans, many of which have gone undocumented and unrecognized. Black History Month affords us an opportunity to honor our heroes both past and present, and to remind ourselves of the many national heroes whose faces do not adorn currency or postage stamps and whose stories are not told in history books or encyclopedias. During this month of celebration, one of the three great African- Americans receiving special honor across the Nation is Frederick Douglass, a man whose life symbolized heroism. Born on Maryland's Eastern Shore in 1818, Frederick Douglass escaped slavery to become one of the leading abolitionists of his time. For Frederick Douglass it was not enough that he won his own freedom; he spent his life fighting for the freedom and advancement of millions of other people. His life, like the lives of many of the other men and women honored during Black History Month, was a life of triumph against overwhelming odds. One only has to visit the birthplace of Frederick Douglass and take a moment to imagine it without the nearby highway, automobiles, and convenience stores in order to have an inkling of the challenges which faced a slave seeking freedom. Not only was there the challenge of escaping an isolated plantation and the constant fear of recapture and torture, but also the challenge to self-educate, find work, and build a new life away from all that was familiar. The history of African-Americans, however, does not begin or end with slavery and the Civil War. Long after the end of slavery, African- Americans continued to fight for freedom and all of its rights. It is a struggle which has inspired people around the world to fight for their freedom. Mr. President, I utter the name of Frederick Douglass not only to honor the man who was known as Frederick Douglass and who achieved so very much with his life, but for all nameless thousands who like Frederick Douglass achieved so much from so little--people who gave their lives so that their children and grandchildren might have better lives, people who have helped to define the real possibilities of freedom and equality in this Nation. Mr. President, as we near the end of this month, I hope that each of us will take a moment to remember the lessons of Black History Month and to carry them with us throughout the year as a reminder of all that is truly possible. Two hundred years ago, how many Americans would have imagined a Thurgood Marshall or an Alice Walker? Black History Month is a time to celebrate--to celebrate all of the great achievements of African-Americans, to celebrate how far this country has come, and to remind us of how much further we have to go.

Mr. SARBANES

Mr. SARBANES. I only point out to my colleague that you could have virtually all the Members of the House there. Let us say you could have 98 percent of the Members there, which would mean nine Members are missing. You could have a very close vote, since the issue may well be very controversial and divisive, and you would not reach the 218 benchmark. So the way this possibility is simply being brushed aside concerns me greatly. The situation I am outlining could easily happen. It has happened in the past. By allowing it at that level, suppose we have ten Members absent?

Mr. SARBANES. Will the Senator yield?

Mr. SARBANES. I think it is instructive that there are many, many close votes in the House of Representatives in which the prevailing side did not obtain 218 votes. The fact of the matter is that, on most votes in the House of Representatives, rarely are all the Members present. After all, there are 435 of them. On many votes, 5, 10, 15, perhaps even 20 Members are absent. And there are a lot of votes in the House that are decided by very close margins--208 to 204, 211 to 205, et cetera, et cetera. Close votes, but they do not reach this level of the 218 votes. I sought to cite what I thought was a really on-point example in terms of the national security being at stake, a 203 to 202 vote with respect to extending the obligation under the draft before World War II.

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

Mr. SARBANES. It would have been 218 votes. The 203 votes fell well short of the 218 votes which this amendment would require in order to invoke the waiver. Now I submit to you, it seems to me that is a clear example where the national security interests of the United States were at stake. Literally 4 months later, we were in World War II. Had that extension not carried, more than 600,000 draftees already in the Army, their obligation would have begun to expire that fall and they would have been departing from the service. Four months later, Pearl Harbor occurred. So I do not see how people can be so almost glib in the sense of asserting that surely this waiver will be invoked in a time of crisis. Clearly then, had the standard applied, we would not have met it and I think we would have been in dire circumstances. Therefore, I very strongly support the amendment which the able Senator from West Virginia has offered. Mr. President, I ask unanimous consent that the article ``How Mr. Sam Saved the Draft; One Vote and a Quick Gavel Rescued the Army on the Eve of War,'' be printed in the Record.

Mr. SARBANES. Mr. President, I underscore what the very distinguished Senator from West Virginia has been saying here on the floor. Section 5 of this article is fraught with danger, and I hope Members will consider it very, very carefully. It says: The provisions of this article may be waived for any fiscal year in which the United States is engaged in military conflict which causes an imminent and serious military threat to national security. The first thing I want Members to think of in their own minds is this: If we could face an imminent and serious military threat to our national security at a time when we were not yet engaged in military conflict. We may recognize that we are going to become engaged in military conflict and we need to take measures to address that situation. Under this provision, no waiver is available in that circumstance because this provision requires that you be engaged in military conflict. I listened to the distinguished chairman of the committee, who made reference to the imminent and serious military threat to national security, as though that was what you needed to show in order to get the waiver. That is not the case. The way this sentence is structured, you have to be engaged in conflict, already engaged in conflict which causes an imminent and serious threat to national security. So you would not be able to react to what I regard as a very pressing situation. Second, even in those situations in which you are able to act according to a waiver, in order to invoke the waiver you have to have the whole number of each House. Now what that means, simply put, in the House of Representatives with 435 Members, you have to have 218 votes to invoke the waiver. Everyone says, ``Surely the Members of the Congress will invoke the waiver in a dire situation of this sort and there will not be any problem with it. Of course, you will get the waiver.'' And my response to that is, ``Don't be so sure.'' And then I say, ``If you go back through our history, there are numerous instances in which very critical votes were carried by bare majorities not meeting the requirement of a majority of the whole number.'' The example I used the other day in the course of the debate was the extension of the draft before World War II. In that instance, the extension in the summer of 1941 came on a vote of 203 to 202. Now, that is a majority of those present and voting and it is clearly a quorum, but it was not adequate to meet the standard that is contained in this amendment. That waiver, therefore, would not have taken place. You would not have been able to make the expenditures necessary in order to carry through this provision. What was at stake then is our national security. As you will recall, in the summer of 1940 we put in place a draft, but the term of service of those who had been drafted was a year and it was due to expire. President Roosevelt sent a message to the Congress to extend the time of the draftees and the guardsmen and the reservists and that had to be enacted in a joint resolution. The joint resolution barely carried on a number of each House.

Mr. SARBANES. I will need just 3 minutes.

Mr. SARBANES. Will the Senator yield for a question without losing his right to the floor?

Mr. SARBANES. But it has funded such operations on occasions when it carried the vote without having a majority of the whole number.

Mr. SARBANES. So the Vice President's casting a vote is nullified.

Mr. SARBANES. Mr. President, just on the factual situation, that is a very close vote. I take it under this amendment, assuming all the other factors were met, we would have a different outcome. Is it your view we have to produce 51 Senators? Or can the Vice President cast the deciding vote in cases of a tie under this amendment?