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I F r release on delivery
10:00 A.M. , E.D.T.
JJedne s day, May 5, 1982

Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Subcommittee on Monopolies and Commercial Law
of the
Committee on the Judiciary
House of Representatives

May 5, 1982


Mr. Chairman, your invitation to discuss the important
issue of fiscal discipline, and specifically,. House Joint
Resolution 350 to amend the Constitution to encourage
budgetary balance, has left me with mixed feelings.


face the hard fact that we have had inappropriately large
budgetary deficits during much of the post-war period


and so far we have failed to resolve a truly threatening
budgetary gap in the years ahead.

Consequently, an effort

to correct the apparent bias toward deficits in the political
process seems timely.

At the same time, I can only be

impressed by the difficulty of attempting to write a
Constitutional provision to induce discipline otherwise
lacking —

a provision that will serve us in fair weather

and foul, and in economic circumstances that can only be
dimly foreseen.
I must at the start emphasize that the questions we face
today about the size of the federal sector, the composition of
spending, and its means of financing require resolution long
before the time-consuming process of amending the Constitution
can be completed.

I have often expressed my concern about the

critical need to break the inflationary momentum that had come
to grip the nation in the 1970s and spoken of the indispensable
role that monetary policy has to play in that effort.

At the

same time, I have emphasized the difficulties that result from
placing too heavy a burden on monetary policy alone in that
fight on inflation —

difficulties manifested in expectionally


heavy pressures on financial markets and interest rates, and
therefore on credit-dependent sectors of the economy.


developments reflect needed progress on the inflation front,
but they only reinforce my concern about imbalance in our
policy approach —

an imbalance reflected in prospective

deficits far larger, taking account of economic activity,
than in the past.

In the absence of needed corrective action,

potential strains on credit markets implicit in the prospective
budgetary picture call into question the assumption of healthy
economic recovery and growth, upon which even those budget
projections are based.

And those prospective deficits are a

contributing factor in today's high interest rates as lenders
and borrowers "discount" their impact on credit market conditions,
The Judiciary Committee is, of course, not the body to
address this serious immediate problem.

But I can only urge

that deliberations on a Constitutional Amendment to provide
for a balanced budget not become a kind of substitute or
surrogate for the action needed, here and now, to deal with
the pressing current situation.

The debate will serve us ill

to the extent it diverts attention from that present need.
I can only be sympathetic with the basic objectives pf
the Amendment proposed in H.J. Res 350.

A budget surplus

has been realized only once in the past two decades and
only eight times in the past 50 years.

The deficits of the

Great Depression and World War II were, by and large, both
unavoidable and, in the circumstances, justified.



particular circumstances as well as developments in economic
doctrine, had the effect of discarding the unwritten, but
operational, rule that budgets should always be balanced.
In the process, some of the traditional disciplines on debt
financing were lost*

During World War I, Congress put aside

the practice of separately authorizing each Treasury debt

The "debt ceiling" authorizations that followed have

failed to focus debate and provide strong disciplines, partly
because that legislation, by its nature, comes at the end of
the fiscal process when payments already committed must be

The budgetary reforms instituted in recent years do

seem to me constructive in forcing more attention to the
budgetary aggregates and the relationship between them, but
they do not appear to have effectively dealt with the deficit
In economic theory, purely discretionary fiscal policy
would not be expected to result in deficits following one
after another, in good times and bad, in war and in peace.
Yet, that is what has occurred in the past two decades.
The results seem to me apparent.

Over time, inflationary

pressures,or crowding out of private investment, or both,
are the economic costs of inappropriate deficits.
At a different level, one can legitimately question
whether loss of a balanced budget discipline has not permitted
us to escape hard, but. necessary, choices between high and low


priority federal spending, at a cost of efficiency and
excessive growth of government.

That is not an argument

that smaller government expenditures are always better than
larger, or that "efficiency" should not sometimes give way
to widely shared social objectives.

The point is that a

balance has to be struck, and it should be struck consciously,
with awareness of the costs.

If the realization or presumption

exists that government expenditures over time must be covered
by taxes, we are likely to have a clearer "market-like" test
of whether a contemplated expenditure really reflects national
In other words, I share the feeling of the supporters of
H.J. Res 350 that the political process, as it has worked in
practice, in the absence of a strong presumption that budgets
should be balanced, suggests some bias toward more spending
and less taxation —

in other words, toward budgetary deficits -

than is healthy for the economy or for governmental efficiency.
The cost has been obscured, but it is real —

a bias toward

inflation, too little private investment, and possibly toward
a federal sector inefficiently large.

In principle, economic

analysis and wise economic advice could counterbalance a
political bias toward deficits.
being exact.

But economics is far from

Economists differ in their policy prescriptions.

If plausible economic reasoning can be found to rationalize
existing political bias —

or if dispassionate economics

merely gives ambiguous results in many instances —
political bias is likely to prevail.



-5At the same time, I cannot argue that budgetary balance
is always appropriate.

The challenge, therefore, is to

establish rules or presumptions that will provide discipline
but not a straight jacket.

That is, as I understand it,

precisely what the proponents of H. J. Res 350 seek.

In my

judgment, they have come closer to that goal than earlier
drafters of a Constitutional Amendment.

But I am left with

an uneasy feeling that a number of unresolved problems remain.
For example, would this Amendment really be of help in
the current situation, when a sizable deficit for a few years
ahead appears inevitable?Somehow, a 60 percent vote of the
entire House and Senate would need to be marshalled for a
deficit budget.

In concept, the need to marshal

that vote

would result in pressure to strike a compromise at a smaller
projected deficit.

But we know there are deeply held con-

victions about particular parts of the budget, and the process
of reconciling those differences might be even more difficult leading to an impasse in adopting a budget.

I am left with a

question about how the impasse might be resolved if a strongwilled majority could not command the necessary 60 percent
In assessing the workability of the proposed Amendment,
I suspect much would depend upon the nature and practicality
of arrangements to enforce the budgetary decision.
a lack of specification —

There is

not only in the Amendment itself

but in any related material of which I am aware —

of the

procedures through which the Congress and the President
shall ensure that actual outlays remain within budget

The point has added force when we recall the large

proportion of federal expenditures made pursuant to entitlements, cost-plus contracts, interest obligations, and so

The sponsors may well have in mind such procedures

as altered handling of budget rescissions or line-item vetoes.
Indeed, such provisions, on their own merits, could go far,
by themselves, in correcting some of the political biases
now affecting fiscal policy.

But such procedures to carry

out the mandate of the Amendment would appear to have
implications for the delicate issue of the balance between
executive and legislative powers.

I have no special expertise

on these issues, and they go well beyond the purview of the
Federal Reserve.

But they do seem to me to be worth consid-

eration before the fundamental step of amending the Constitution
is undertaken.
I also have reservations about other parts of the Amendment.

Section 2, which limits the growth of revenues in the

absence of an affirmative vote of the Congress, could have
some peculiar implications.

There is no obvious economic

logic to limiting the growth rate of revenues for budget purposes
in a fiscal year to the rate of change of income during the previous
calendar year, which might be a year of recession

or expansion.

Moreover, many specific tax structures would give rise to



levels of revenue differing from the amount contemplated
by the formulation in Section 2, thus requiring annual reaffirmations of the tax structure.

The consequent require-

ment for relatively more frequent votes on the overall tax
structure —

even if only to reaffirm it —

could increase

uncertainty about the tax structure in ways that would not
be helpful in terms of the continuity of the tax structure
and private planning.

This section does have the advantage

of reducing somewhat the potential problem of relying on
"biased" revenue estimates.

However, that problem can be

approached more directly, as it is to some extent today
with "competing" estimates by an Administration and by a
non-partisan Congressional Budget Office.
Section 4, which pertains to federal-state fiscal
relations, on the one hand, seems to provide a needed
safeguard against the "exploitation" of state budgets
for federal purposes, but, on the other hand, would seem
to pose some potential hazards to the formulation of new
state-federal programs that might, on their merits, be

I gather that this section has so far received

less scrutiny than others, and I urge you to give it careful
In summary, I recognize and applaud the serious efforts
that both the House and Senate are directing to the important
issue of how to establish firmer fiscal discipline.

I would


agree that the record of the federal budget for quite a
few past years, and the critical federal deficit prospects
for the future, suggest that we should no longer dismiss
out of hand a Constitutional approach.

But I would continue

to approach the question of a Constitutional Amendment with
great caution; the Constitution cannot, and should not, be
changed lightly to meet considerations or situations that
are transient in nature, nor to "lock in" a particular
economic doctrine.

I am not personally satisfied that the

proposal, as it stands, is fully workable.

Nor do I believe

that the matter of a Constitutional Amendment —

given the

years that must elapse before it became effective —


nearly as urgent as resolving constructively the current
budgetary impasse.
In a sense, the current budget debate seems to me to
provide an acid test of the will of the Congress —

and of

the Nation -- with regard to budgetary responsibility,


vote for a future amendment seems to me not nearly so meaningful as action now —

and cannot substitute for it.


we fail that challenge, the case for a Constitutional Amendment seems to me vastly strengthened.

But, for the moment,

I would rather see us meet the budgetary test directly.