I have an equally strong conviction that a balanced budget amendment is a threat to our economic health, will expose our economy to unacceptable risks and should not be adopted. I also believe that such an amendment is not necessary to achieve the critical objective of balancing our budget.

Throughout our history, with the exception of wartime, budget deficits -- when they existed at all -- were generally small. In the 1970's and 1980's, they began to rise and the federal debt grew sharply. But after experiencing this period of fiscal indiscipline, I believe the atmosphere in Washington has changed.

This process of change began in 1990 with the passage of the Omnibus Budget Reconciliation Act signed into law by President Bush. We then took an enormous step forward with the deficit reduction program enacted in 1993, which has led to a reduction in the size of the deficit from 4.7% to 1.4% of GDP. Last year, both the Administration and the Congress proposed budgets that would eliminate the deficit by 2002 and both are expected to do so again this year.

Not only has the atmosphere in Washington changed, but there is also a new enforcing factor at work which is the emergence of global markets that are highly sensitive to a nation's degree of fiscal responsibility. A nation that does not address fiscal matters will be severely punished by markets with high interest rates that could impair or even severely impair its economy.

The sum total is that politically, historically and economically, the forces are in place to balance the budget. We are not far apart. Now we need to get the job done. RR-1453 However, there is a distinction between balancing the budget and passing a constitutional amendment. When we contemplate an action as significant as amending the Constitution to require a balanced budget, we owe it to the American people to understand exactly what its consequences would be. And those consequence are serious. I believe the balanced budget amendment proposal would subject the nation to unacceptable economic risks in perpetuity.

• First, a balanced budget amendment could turn slowdowns into recessions and recessions into more severe recessions or even depressions.
• Second, it could prevent us from dealing expeditiously with emergencies such as natural disasters or military threats.
• Third, it would seriously increase the risk of default on our national debt.
• Fourth, the escape clauses it provides at best are likely to be far from fully effective. Under the amendment, there would be a significant time lag from when an economic problem developed until we reach a consensus on how to solve it. The escape clauses would also enable a minority in either the House or Senate to use its leverage to subject the nation to unacceptable economic risks; and

Fifth, the amendment poses immense enforcement problems that might well lead to the involvement of the courts in budget decisions, unprecedented impoundment powers for the President or the temporary cessation of all federal payments. Any of these options could disrupt Social Security and Medicare payments. Alternatively, the balanced budget amendment might be unenforceable and therefore have no effect at all, contributing to cynicism about the process of government.

For these and other reasons, I would like to expand on why I believe a balanced budget amendment would create unacceptable risks for our economy.

I. More Severe Recessions

As Secretary of the Treasury, I am deeply concerned that a balanced budget amendment could turn slowdowns into recessions, mild recessions into worse ones and bad recessions into depressions. A balanced budget requirement in the Constitution would make recessions longer and more painful, first, by eliminating automatic stabilizers that protect people during a downturn and, second, by instead requiring measures to cut spending or increase taxes during slowdowns and recessions when the economy is already suffering from lack of demand.

Since World War II, we have made immense progress in reducing the toll of the boom and bust cycle through the introduction of automatic fiscal stabilizers and effective use of counter-cyclical fiscal policy. Under current law, for example, if unemployment rises, unemployment insurance payments rise as well, moderating the economic impact of recessions on companies, workers and their families.

Mr. Chairman, the extremes of the business cycle have declined sharply over the post-war period compared with the pre-war era. A balanced budget amendment would undo this progress by turning off these stabilizers and actually require measures that could exacerbate a recession. To take just one example, without automatic stabilizers, Treasury has estimated that unemployment in 1992 might have hit 9 percent instead of 7.7 percent, in excess of one million more jobs lost. Even were a 3/5 vote to waive the provisions of an amendment obtainable, slowdowns and recessions are hard to anticipate, and congressional action would almost surely be at the very least months late, by which time critical damage to the economy would already have been done.

II. Inability to Cope with Crises

A balanced budget amendment would also prevent us from dealing quickly and effectively with crises, from a second S&L crisis to a second Hurricane Hugo to an escalating military threat.

For example, in September of 1989, Hurricane Hugo struck the Carolinas, causing billions of dollars of damage. After President Bush declared a major disaster, Congress took action by appropriating $2.7 billion in emergency supplemental assistance to help the area rebuild. Under the Balanced Budget Amendment, if the budget were otherwise in balance, this could not be done until after a vote of 60% in both houses.

III. Increased Risk of Default

As Secretary of the Treasury, I am also highly concerned that limits on our flexibility would increase the risk of default on the federal debt. The possibility of default should never be on the table. Our creditworthiness is an invaluable national asset that should not be subject to question.

Default on payment of our debt would undermine our credibility with respect to meeting financial commitments, and that in turn would have adverse effects for decades to come, especially when our reputation is most important, that is, when the national economy is not healthy. Moreover, a failure to pay interest on our debt could raise the cost of borrowing not only for government, but for private borrowers from companies to homeowners making payments on an adjustable mortgage.

It is also worth remembering that interest payments are only one type of obligation. If we are not able to meet our obligations, members of our armed forces, retirees receiving Social Security, those who depend on Medicare and many others, could suffer as well. The risk of this happening must not be increased.

Finally, the history of debt limits shows that raising the statutory debt limit is never an easy process. We all remember the enormous difficulties that surrounded this issue in 1995 and 1996. A requirement for a supermajority vote in both houses could make it far harder.

IV. Potential for Gridlock from the Supermajority Requirement

Proponents argue that the Constitutional amendment is needed to stiffen our resolve to balance the budget. But they also assume that, when necessary, Congress will waive its provisions by obtaining a three-fifths majority vote.

This is a risky assumption. In fact, the history of Congress shows that it can be extremely difficult to obtain a three fifths majority. It will be especially difficult to obtain a supermajority to waive the Constitution of the United States. And it ought to be.

It is true that 60 votes are usually required for cloture in the Senate. Even more fundamentally, the Senate has long honored the rights of a minority to express its views and influence legislation. Nevertheless, recognizing that certain essential matters should not be held up by a minority, Senate rules permit a reconciliation bill which can be a vehicle for passing a budget or increasing the debt limit, to be passed by a simple majority. In contrast, this amendment would require a 3/5 majority to increase the debt limit or obtain a waiver from its provisions and would extend this supermajority requirement to such votes in the House.

Thus, for example, 41 Senators or 175 Congressmen could throw the government into default; 41 Senators could stop Social Security checks from going out or could advance a special agenda. In effect, a minority in either house could put the economic health of our Nation at risk by refusing to waive the balanced budget requirement or refusing to increase the debt limit unless that minority's agenda -- which could be budget related or related to social policy or any other matter -- was satisfied.

Let me add that a balanced budget amendment would also limit our ability to deal with national economic downturns in which only some regions were suffering, because most members would not be experiencing the economic problems making a 60% waiver more difficult to obtain.

Finally, we cannot predict the political environment, ten, twenty or thirty years from today, and we should not create enormous minority leverage in the face of uncertainty about future political conditions.

V. Enforcement Difficulties

A balanced budget amendment may well be unenforceable. There is no way to compel Congress and the President to enact legislation to cut spending or raise taxes to balance the budget. Yet there is also no way to compel enactment of legislation to waive the provisions of the amendment. It is not hard to imagine a situation in which a 2/5 minority of Congress opposes tax increases, a different 2/5 minority opposes spending cuts, and another 2/5 minority opposes a waiver of the balanced budget amendment to raise the debt limit. The amendment provides no method for resolving such an impasse.

Some proponents have suggested that under these circumstances, the President would stop issuing checks, including those for Social Security benefits. Alternatively, judges might become deeply involved in determining whether Social Security or Medicare checks would be stopped. The President might also impound funds of his choosing. Or, the amendment might just prove to be unenforceable and therefore a nullity, reducing respect for the Constitution. All of these potential outcomes are extremely undesirable.

VI. Additional Problems

Let me mention, finally, two other problems. First, by requiring that a majority of the whole Congress approve a revenue increase, the amendment could make it more difficult to close special interest loopholes and eliminate obsolescent deductions and credits. Over time, this would reduce the fairness and efficacy of our tax code.

Second, unforeseen events could lead to a large end-of-the-year shortfall that could only be met in a very short period of time. Such shortfalls happen in many years. In FY 199O, for example, CBO re-estimated the deficit upward by $60 billion in the last nine months of the fiscal year. In such a case, huge cuts would be needed in those programs that happen to have payments late in the year, or where cuts can be made quickly regardless of the consequences.

These are just two examples of why it would be a mistake to enshrine economic policy in the Constitution. We have no idea what economic conditions will be like in 10, 20, 30 or 40 years, and creating policy inflexibility is extremely unwise.

Conclusion

As I said at the beginning of my testimony, I have a deep commitment to the importance of deficit reduction and fiscal discipline to our nation's economic health, and I believe that we can put in place balanced budget legislation this year. But I have an equally strong conviction that a balanced budget amendment poses real risks for our nation's economic future and, for this reason, must not be adopted.