WASHINGTON -- Balancing the budget in the next five years, as required under a constitutional amendment being considered in Congress, would be neither impossible nor bad for the economy, the head of the Congressional Budget Office said yesterday.
In testimony before the House Budget Committee, agency director Robert Reischauer contradicted a dire warning issued by an ad hoc group of 447 economists on Tuesday that severe economic problems and dislocations would inevitably result if Congress adhered to a constitutional mandate to eliminate the deficit.
The private economists, who included seven Nobel Laureates, argued that the constitutional amendment would "worsen the nation's economic prospects" by exacerbating recessions, discouraging long-term capital planning, increasing economic uncertainty, and thwarting international economic planning.
Mr. Reischauer acknowledged that the amendment -- which would require a three-fifths vote of Congress to permit deficit spending--could put the government in a fiscal straightjacket making it more difficult to respond to economic emergencies. But he nevertheless insisted that carrying out the amendment would improve the economy overall, and especially in the long run.
"The short-run loss in output and increase in unemployment could be relatively small if the Congress begins moving toward budgetary balance at least five years before the deadline [in 1997], and if the Federal Reserve provides an accommodative policy. Under those conditions, balancing the budget should not stop the economy's recovery from recession and will enhance the prospects for sustained long-run growth," he said.
The Fed, under Chairman Alan Greenspan, has been accommodative in response to Congress's major efforts to reduce the deficit.
Shortly after Congress passed the 1990 budget agreement, which contained an estimated $425 billion of spending cuts and tax increases, the Fed lowered the federal funds rate by 1/4 point. Mr. Greenspan for months afterward was an outspoken proponent of the agreement.
The interest rate reductions resulting from additional Fed easing as Congress moved to implement the constitutional amendment, combined with the government's substantially lower debt service costs, would cause sufficient stimulus to the economy to avoid any downward spiral from the budgetary retrenchment, Mr. Reischauer said.
In addition, he said, Congress would have to make only a moderately greater effort than it did in 1990 to balance the budget by 1997, the date proponents say the constitutional amendment would likely take effect.
The goal could be accomplished with spending cuts and tax increases totaling 600 billion over five years -- about 40% more than the actual amount of deficit reduction achieved in 1990, he said. "Balancing the consolidated budget in five years would be a difficult, but not an impossible, task," he noted.
The pain caused by the constitutional amendment would be greater if Congress chose to exclude Social Security from the budget, as proposed by House Majority Leader Richard Gephardt, D-Mo., last week in an alternative to the leading amendment in the House. The Gephardt proposal would require Congress to find another $200 billion -- or $800 billion total -- of deficit cuts in the next five years, he said.
On the other hand, if the economy grew faster than the 2.1% a year that the Congressional Budget Office is assuming, only 500 billion of deficit cuts would be required, he said.
Mr. Reischauer has been highly critical of members of Congress who advocate passage of the constitutional amendment alone this year, putting off the difficult debate over how to reduce the deficit. He strongly endorsed the call by Rep. Leon Panetta, D-Calif., for action on a deficit-reducing enforcement mechanism immediately after passage of the constitutional amendment.