The Balanced-Budget Amendment

The Balanced-Budget Amendment

Nov. 30 2004 4:19 PM

The Balanced-Budget Amendment


Jim Miller
7:12 a.m.  Monday  12/9/96

       A large body of academic (especially "public choice") literature suggests that the way the federal government goes about taxing, borrowing, and regulating leads to a public sector that is "too big." This is borne out by studies which: (a) find that tax rates are far higher than the levels which would maximize economic growth, (b) question the efficacy of many government spending programs, and (c) determine that much of our regulatory efforts cost far more than they should and/or generate little in the way of benefits to society. While none of these studies is beyond criticism, it's hard to draw any but the obvious conclusion.
       Moreover, of the various ways the federal government obtains control over resources--taxing, borrowing, and regulating--the second is of particular concern, inasmuch as voters do not readily feel its impact and thus are prone to use it to excess.
       In an optimal world, depending on your preferred theory of fiscal finance (e.g., Herb Stein's famous "balanced budget at full employment" construct), the federal government sometimes would run a deficit and sometimes would run a surplus. But the world isn't perfect. Despite the "costs" associated with prohibiting deficits altogether (except in certain national emergencies), these costs pale in comparison with those associated with a regime which leads, inevitably, to an endless stream of deficits.
       Would a balanced budget amendment (BBA) work? Obviously, the specific language adopted must be sufficiently "tight" so that the amendment, if passed and ratified, would make zero deficits the rule, not the exception. Frankly, I am not sure that Congress will pass a truly airtight amendment. For example, when I was President Reagan's budget director, I commented on the version of the BBA before Congress and pointed out certain loopholes that needed to be closed. I was told by the sponsors that such loopholes were necessary to garner support for the measure.
       When Mark Crain and I examined the experiences of states with balanced-budget requirements (summarized in Budget Process and Spending Growth, William and Mary Law Review, Spring 1990), we found that a balanced-budget requirement, even without a tax-limitation provision, reduces the rate of growth in per-capita spending. And, of course, a balanced budget would free up domestic savings for use in the private sector, enabling more economic growth.
       The BBA isn't perfect. But we can't let the impossible perfect be the enemy of the feasible good.

Robert D. Reischauer
7:29 a.m.  Monday  12/9/96

       Before we adopt an amendment requiring a balanced budget, we should seek answers to four questions. Is the purpose of the amendment sufficiently serious to warrant changing the nation's fundamental charter? Are there less profound and irreversible ways of achieving the amendment's objective? Is the amendment likely to bring about its desired result? (Remember prohibition?) And, finally, even if the amendment achieves its primary purpose, could it also have significant adverse consequences?
       Certainly, the growing deficits of the past two decades do constitute a major problem, one which will have profound consequences for the future of the republic if not addressed. Economic growth, future living standards, and our ability to cope with the difficulties inevitable in a diverse, democratic society with a market-based economy, could be seriously reduced by allowing public-sector deficits to grow.
       Through the 1970s and 1980s, the political system was incapable of exerting any sustained fiscal self-discipline, even when it donned the extraordinary straightjacket of Gramm-Rudman-Hollings procedures. The experience of the past six years, however, offers more hope. Major multi-year deficit-reduction packages were enacted in 1990 and 1993, and the 104th Congress made more progress by restraining discretionary spending and passing farm and welfare reforms. Relative to GDP, the deficit for 1996 fell to the lowest level since 1972. If the president and Congress can agree to a large package of spending cuts next year--which many believe to be possible--a balanced budget could become a reality early in the next century without a constitutional amendment.
       Of course, procedures can make a difference. A constitutional amendment undoubtedly would stiffen the resolve of policy-makers and lead to smaller deficits. But the benefits of lower deficits must be weighed against the less positive consequences of an amendment. The federal government's ability to stabilize the economy could be seriously compromised by such an amendment. Mandates, regulations, and tax expenditures could proliferate as policy-makers, constrained in their ability to spend money, turn to mechanisms that often are less effective, less visible, or less controllable responses to problems. The courts could be dragged into budget debates to rule on just exactly what constitutes federal outlays and revenues.
       Amending the Constitution is serious business. It should be undertaken only as a last resort.

Robert Shapiro
8:07 a.m.  Monday  12/9/96


       Judging by the proposal to make a balanced budget constitutional doctrine, it seems that in economic affairs as well as judicial matters, hard cases make bad law.
       Yes, large and persistent budget deficits such as occurred under Ronald Reagan and George Bush do tend to dampen domestic investment, which in turn tends to reduce long-term growth. But the costs of sustained fiscal profligacy do not translate into an economic logic to balance the budget every 12 months.
       This standard is not only arbitrary; it is virtually certain to do more harm than good. Whenever the economy slows down, naturally reducing tax revenues and increasing certain program costs, the amendment would worsen the downturn by forcing Congress to further dampen demand by raising taxes or cutting spending. And a provision to suspend the amendment during recessions would be almost useless, since we usually do not know a recession is happening until it is upon us. Anyway, the depressing effects of the amendment would be felt not just in full-blown recessions, but whenever the economy slowed at all.
       The amendment also would treat consumption and investment just the same. Imagine, if you can, that states and cities could no longer float bond issues to build sewers and schools, corporations couldn't borrow to build factories, and families had to save the cash to buy a home rather than take out a mortgage. That's the approach this amendment would take with the national government, which would have to pay up front not only its operating expenses, but all capital investments as well.
       Nor are these strictures justified by out-of-control spending and taxes. Americans already spend a smaller share of GDP on government, and collect a smaller share in taxes, than any other major industrial nation. Moreover, not only is our deficit as a share of GDP the smallest in the advanced world, but our federal deficit is already smaller than our genuine annual public investments, which properly can be financed through borrowing.
       The truth is, the clamor for this amendment has little to do with economics and everything to do with a political agenda to cut back government's scope and responsibilities. If the American people want a government that does less--which I doubt--so be it. But any current preference should not be permanently enshrined in our Constitution.

Paul Simon
9:08 a.m.  Monday  12/9/96


       The Balanced-Budget Amendment (BBA), even with its anticipated imperfections, would be a very positive step forward for our country. In fiscal year 1996, the gross interest expenditure was $344 billion, 11 times what we spend on education, 22 times what we spend for foreign economic assistance, and roughly twice what we spend on basic poverty programs. The bipartisan Concord Coalition has concluded that the deficits of the last two decades are costing the average American family $15,000 in lost annual income. The BBA would force fiscal discipline, end the use of tax dollars to pay for interest, and start giving American families the income they need.
       During this week, I hope we can discuss and debunk some of the following myths: that the BBA will remove governmental flexibility to respond to recessions; that balancing the budget will not have immediate and positive effects on our incomes; that balancing the budget hurts programs for poor people; that Congress can balance the budget without a constitutional amendment; that the deficit simply represents money that we "owe to ourselves"; and that we are not harming ourselves with deficit spending.
       I will start my discussion by responding to two proposed BBA requirements described by the moderator. First, I do not think that the BBA should exclude the Social Security trust accounts. The history of nations shows that when debt is piled up, servicing the debt will require the printing of more money (known by economists as "the monetization of debt"). This will lead to a dramatic reduction in the value of the trust funds. Robert Myers, the chief actuary for Social Security for 21 years, says that a balanced-budget constitutional amendment is essential to preserving Social Security.
       Second, I do not think there should be restrictions on the power of Congress to increase taxes. One myth about our government is that Americans are overtaxed. Of all the nations of Western Europe, Japan (including its industrial compact), Australia, and New Zealand, the United States has the second-lowest total tax burden as a percentage of income. Unfortunately, while U.S. taxes are lower, there is more hostility toward taxes in our country than in other countries. Part of the hostility is due to the fact that, with the exception of Israel, no other industrial nation spends as high a percentage of tax dollars on the nonvisible items of interest and defense. In other countries, people see government helping them on concerns such as health care, instead of on interest payments.

Herb Stein
1:47 p.m.  Monday  12/9/96

       We are now closer to a balanced budget than we were when the BBA (we might as well use this abbreviation) first became a hot issue, and even closer than we expected to be when the amendment was voted on in 1995. What is the significance of that? One interpretation is that this development shows that the government can follow a responsible budget policy without the straitjacket of the BBA. But there is a question about how much of this movement toward a balanced budget was the result of fortitude and how much was fortuitous--that revenues turned out to be more, and expenditures less, than expected. Another interpretation is that being close to a balanced budget gives us the best opportunity to pass the amendment, under the principle of fixing the roof while the sun is shining. The argument is that we could move to a balanced budget without a great shock now and have the amendment in place as protection against the big deficits that are looming beyond 2002. How do the panelists view this situation?
       Another aspect of our recent experience is relevant here. We found that the actual budget deficit for fiscal year 1996 turned out to be very different than was estimated, even halfway through the year. How would the government deal with such variances under the BBA? Suppose the president and Congress have agreed on a budget that would be in balance and then discover 9 months later that they are way off. What would they do then?