The Balanced-Budget Amendment

Robert Shapiro
7:53 a.m.  Tuesday  12/10/96

       THE BBA VS. THE DEMOCRATIC PROCESS        Herb Stein, our wise moderator, sensibly points out that without rewriting the Constitution, we have managed to impose substantial fiscal discipline on ourselves. And it has occurred through sustained public debate and the normal electoral process–just as it’s supposed to in a democracy.
       At every step, it also has required political leadership–from President Bush and both parties in Congress in 1990, from President Clinton and a Democratic Congress in 1993, and from President Clinton and a Republican Congress in 1995. And earlier this year, congressional leaders and the president offered separate plans that the Congressional Budget Office agreed would produce a balanced budget in 2002.
       To be sure, for a while the democratic process valued other goals more highly than budget balance. But that’s the point in a democracy. On the other hand, the BBA would have precluded conservative arguments in the early 1980s that tax cuts and defense modernization were more important than an annual balanced budget, or the liberal case that Social Security and Medicare are more important. Why would we pre-empt this process in the future–especially now, when we have shifted to increased fiscal discipline anyway?
       Herb Stein also astutely notes that the BBA would always be behind the curve: Congress would know whether or not the budget was balanced only long after making the decisions that would produce it–or not. Would Congress then cut future spending to make up for a past deficit? In this way and others, a BBA seems at best unwieldy and at worst practicably unenforceable. Sen. Paul Simon
8:05 a.m.  Tuesday  12/10/96

       In Herb Stein’s introductory remarks, he accurately says: “The federal government is now closer to reaching a balanced budget than at any time in many years.” What he does not say is that while both parties have agreed to balancing the budget by the year 2002, both parties also reserve the tough decisions until the years 2000 and 2001. Herb Stein will grow green hair before it happens without the constraints of a constitutional amendment. People elected to public office like to do popular things, not unpopular things, and there is no popular way to balance a budget. We need the muscle of a constitutional amendment to force us to do it. Without such an amendment, in 10 years the budget will be massively in deficit.
       When Bob Reischauer suggests that “the federal government’s ability to stabilize the economy could be seriously compromised,” he ignores the fact that when we have taken steps like extending unemployment compensation during a recession, they have almost always passed by more than 60 percent, the requirement for passing a deficit bill under the proposal. He also ignores the suggestion of one of the amendment’s strong supporters, economist Fred Bergsten, who says that a small cushion should be built each year of a surplus of 2 or 3 percent, so the federal government could act quickly. This is also the suggestion of Pete Peterson, former Commerce Secretary, in his new book in which he now supports a constitutional amendment. Reischauer’s argument also ignores the belief of a large body of economists who say that by the time Congress now reacts to a recession, the economy is already on its way to self-correction.
       All econometric projections of the results of the passage of such an amendment are that long-term interest rates would drop significantly. That would certainly be beneficial to the economy.
       Robert Shapiro’s criticism that the amendment would treat “consumption and investment just the same” fails to note one significant fact: In years when we have balanced the budget or come close to doing it, our investment numbers have risen. And when he says that “the clamor for this amendment” is aimed at cutting “government’s scope and responsibilities,” I dissent loudly. I want government-initiated health care for all Americans, for example, while Sen. Orrin Hatch does not. But where we agree is that, if we are to have such a program, it should be done on a pay-as-you-go basis. Any other way robs from our children.
       When Eisenhower was president, he wisely suggested that we have an interstate highway program. He unwisely suggested that we issue bonds to build it. Senator Albert Gore Sr. said we should build it, but do it on a pay-as-you-go basis, increasing gasoline taxes to do it. His amendment has saved us more than $750 billion in interest.
       I want a government that responds to the needs of those who struggle, but I don’t want to borrow from my grandchildren to do it. Jim Miller
12:02 p.m.  Tuesday  12/10/96

       REACTIONS TO COMMENTS BY MODERATOR AND PANELISTS        The deficit is lower than expected in part because the president and members of Congress are under the gun to make substantial progress in the direction of fiscal discipline. My concern is that this progress, contrary to Herb’s hypothesis, will lessen the impetus to pass a BBA. My maternal grandfather, Felix Moseley, a country blacksmith, often said of the hole in the roof of his tiny shop, “Jimmy, see that hole up yonder? Well, when it rains, I can’t fix it, and when the sun shines, it doesn’t need fixin’.”
       Economic forecasting is not an exact science. Under the BBA, if there’s a surplus, there’s obviously no problem. If a deficit (and thus violation of the Constitution-as-amended) looms, there are two possibilities. First, by two-thirds roll-call vote, Congress can choose to legitimize a deficit, or, second, Congress and the president can increase tax rates (almost certain to increase revenue in the short run) or restrain outlays. The latter is not so difficult as critics make out. Millions of families face the same dilemma in their personal finances every month and find ways of making ends meet. The federal government can do the same.        To Rob Shapiro:        “Take a deep breath and relax” is what you do in a physician’s office when she’s trying to diagnose what ails you. We know what ails us. It’s chronic deficits, going back to 1969.
       Most members of Congress know this as well. They are rather like the murderer who runs into the police station shouting, “Stop me before I kill again!” We must encourage them, and they must pass a balanced-budget Constitutional amendment.
       The prospect that a BBA would worsen economic downturns presumes that fiscal policy affects economic output in an immediate and predictable fashion. The weight of empirical evidence suggests this just isn’t so.
       Ideally, the federal government would operate on a capital budget rather than a cash budget. The problem is that the (theoretical) gains would be swamped by the (real-world) losses, as politicians would load current spending into capital accounts and make budget discipline meaningless.
       To the extent serious problems might arise because of a shortfall in revenues, even without exercising the supermajority provisions of the BBA, Congress and the president might establish and periodically make use of a “rainy day fund,” much as governors do in states requiring a balanced budget.        To Paul Simon:        There is a need to couple the BBA with a tax-limitation provision. The reason is that there is a tendency for modern representative democracies to impose tax rates that are higher than is optimal. A provision requiring some sort of supermajority to raise tax rates would address this bias.
       While I endorse a tax-limitation provision, I would not oppose the passage of a simple BBA if that’s the best we can get. The reason is that a requirement for a balanced budget will increase the perceived cost of government, and we will get less of it even if tax revenue is increased as a result of the requirement that revenues be sufficient to cover outlays.
      
       To Bob Reischauer:
      
       On the question of whether the deficit problem is sufficiently serious to warrant amending the Constitution, I think it instructive that shortly before he died, Thomas Jefferson confided to a friend that the loophole allowing deficit finance was the Constitution’s most serious defect. (The issue of slavery notwithstanding!)
       The “extraordinary straitjacket of Gramm-Rudman-Hollings” helped reverse a ballooning deficit, leading to the largest single-year progress in history (a $71-billion reduction). Had Gramm-Rudman-Hollings not been revised by a spendthrift Congress, the budget would be balanced already.
       As for the BBA’s handicapping the ability of the federal government to stabilize the economy, see comments on Shapiro above and note that the literature suggests that monetary policy is much more effective and predictable than fiscal policy and “regulating” aggregate demand. Robert Reischauer
1:08 p.m.  Tuesday  12/10/96

       It would be a difficult task to hit a balanced budget in any year because the deficit is the difference between two very large, volatile, and imperfectly controlled amounts–namely, federal revenues and spending. Revenues bounce around with the economy’s perturbations and with fluctuations in the stock market. Spending for entitlement programs and debt service, which account for two-thirds of the total, is sensitive to changes in inflation, interest rates, unemployment, and economic growth. Projecting revenues and spending with a high degree of precision, therefore, is an impossible job, and small errors in projecting either can produce large swings in the deficit. This can be illustrated by noting that the Office of Management and Budget’s estimates made three months before the end of fiscal year 1996 underestimated revenues by $26 billion (1.8 percent), overestimated spending by $12.3 billion (0.8 percent), and overestimated the deficit by $38.3 billion (36 percent).
       Because of this uncertainty, policy-makers would either have to build-in a cushion by planning for budgets with substantial surpluses or provide the president with a good deal of authority to curb spending or augment revenues during a fiscal year without congressional interference. Senator Simon suggests that a “small” surplus of 2 to 3 percent of GDP would do the trick. But by 2002, this would mean surpluses of $150 billion to $225 billion. We have a pretty good idea of the spending cuts that have been proposed to reach a balanced budget, but there has been no discussion of which programs would be scaled back and which taxes increased to achieve such surpluses. Issues like this make it clear that the legislation needed to implement a BBA will be devilishly complex to design and as controversial as the BBA itself. Certainly, we should examine how a BBA would be implemented before we approve such an amendment. Herb Stein
1:44 p.m.  Tuesday  12/10/96

       As is usual, each side in this debate is very strong on the negative side, pointing out the deficiencies in the opponent’s position. Each tends to contrast an idealized version of his own preference with what he describes as a realistic version of his opponent’s preference. It might help to bridge this gap if each side would say something about the criticisms made of his position.
       I take it to be the heart of Miller’s argument, and indeed of the whole argument for the BBA, that the present process contains an inescapable bias. There is a conflict between the short-run interest of the policy-making politicians and the long-run interest of the nation. The result is that the future is neglected, and this neglect is manifest in the budget deficits we have been running.
       Do the opponents of the BBA accept this argument, or see anything at all in it? Shapiro wants us to rely on the democratic process, but I suppose the Miller argument is that this bias is inherent in the democratic process, where the present votes but the future does not. If the opponents of the BBA accept any part of the argument, do they have any suggestions for correcting the bias?
On the other hand, critics of the BBA raise a host of difficulties of management, definition, adaptation to unforeseen circumstances, and so on. Mostly, the proponents of the BBA ignore these criticisms. Do they consider them insignificant? Simon does refer to the problem of adaptation to cyclical fluctuations and mentions the Bergsten proposal to run a large surplus in good times so that there would still be a balanced budget in recession. Reischauer points out the size of the surplus that would be required. I don’t know whether the Bergsten-Simon proposal is to incorporate a requirement for a surplus of that size in the BBA. If not, won’t we be relying on the same imperfect political process that could not balance the budget to produce the desired good-time surplus? It would be interesting to hear panelists on either side speculate on what would have happened to the budget after 1980 if the BBA had been in effect. I remember interesting testimony on the BBA given by James Schlesinger two years ago. He said that if the BBA had been in effect in the 1930s, we would not have built the aircraft carriers that won the battle of Midway in 1942. An interesting speculation.