The Balanced-Budget Amendment

The Balanced-Budget Amendment

Nov. 30 2004 4:21 PM

The Balanced-Budget Amendment

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Robert Shapiro
8:02 a.m.  Thursday  12/12/96

       ONCE AGAIN, WHAT'S ALL THE FUSS ABOUT?

       Jim Miller and Paul Simon are entirely correct in their determination to avoid another episode like the 1980s, when large and persistent deficits quadrupled the national debt. The United States has paid a high price for that episode of fiscal irresponsibility in higher interest rates, slower investment, and, for millions of Americans, meager income gains. If such deficits proved intractable, it would be reasonable to consider radical measures such as the BBA.
       But deficit hawks like Jim Miller and Paul Simon--among whose ranks Bob Reischauer and myself are usually counted, too--have already carried the day without such a radical step. After more than a half-dozen significant revenue increases and even more rounds of spending restraint, the deficit this year is equivalent to less than 1.5 percent of GDP--roughly the amount allocated by the federal government to genuine economic investments in education, training, R&D, and infrastructure. Federal spending over the last three years has grown by only 3.5 percent a year, barely as fast as inflation and only half as fast as the decade previous, and the national debt as a share of GDP is falling.
       To be sure, deficits that could dwarf those of the 1980s loom in the coming century if we do not reform Medicare and Social Security. Yet without a BBA, Congress and the president already appear ready to reach a compromise on Medicare. Moreover, while Social Security's budget problems are still somewhat distant, just the prospect has been enough to spark the beginnings of a new national debate over reforming the government's largest and most popular program.
       Our moderator, perhaps mindful of our common preference for fiscal discipline, entreats us to compromise. Yes, an arrangement that required balancing the budget over five years instead of one would reduce its threat to macroeconomic stabilization. Unfortunately, it wouldn't be less unwieldy to administer. He also asks if we could suggest an arrangement to promote fiscal discipline that would be less binding than a constitutional amendment but more restrictive than an ordinary law. Yes; following the current budget act, we could require a three-fifths vote in each house of Congress, for example, to exceed a new cap on the growth rate of entitlement spending.
       Finally, our wise moderator raises the issue of moral hazard: Might the debate over the BBA, in effect, take the place of concrete action on the deficit? Perhaps. Just as important, if the BBA were to become part of our Constitution, endless debates over how to measure spending and revenues, and how to meet the standard, could well crowd out congressional action in virtually every other area. And even the BBA's most fervent supporters do not claim that a balanced budget alone would be enough to restore stronger growth and broader economic opportunity--the object of the entire exercise.

Jim Miller
12:44 p.m.  Thursday  12/12/96

       Due to the deft touch of our moderator, we appear to be in more agreement than may be the case. "Herb Stein is right." "Bob Reischauer knows well." "Shapiro's point [is] important." "Jim Miller and Paul Simon are entirely correct." "Jim Miller is right." Who'd have "thunk" it!
       As Rob Shapiro points out, we're all deficit hawks of one coloration or another. The question is how to achieve the goal we share. To put the matter in stark terms, Shapiro and Reischauer seem to have faith that our elected officials will do the appropriate (I almost typed "right") thing. I don't, and I gather Senator Simon doesn't either, and he (still) is one!
       The nature of a constitution is to place limits on what the collective can and cannot do. We have ample evidence that without some limitation the federal government will engage in deficit finance to great excess. So, we need a BBA.
       On another matter, I agree with Herb Stein (and President Eisenhower) that there's nothing sacred about budget balance every 365 (or even 366) days. Like most of us, I believe much good could be accomplished if we adopted two-year budgets, or for some programs even longer time frames.
       Establishment of a "rainy day fund" would largely solve the technical problems associated with closure on an annual cycle. When needed, the fund could be dipped into. But during the next cycle there would be pressure to replenish the fund by running a surplus.
       I'm not particularly concerned about the "Peltzman effect" here. Passage and ratification of a BBA would focus attention on budget decisions in ways heretofore not imagined. No longer would there be the escape valve of simply running a deficit. As Benjamin Franklin would say, members of congress and the president will all have to hang together, for surely if they don't they'll all hang separately.
       Finally, about that advice on picking stocks: buy low, sell high.

Sen. Paul Simon
2:16 p.m.  Thursday  12/12/96

       One reason that there were so many heroes at the Alamo was that there was no back door. One reason that there have been so few heroes when it comes to balancing the federal budget is that there are too many back doors. We have a decades-long history of avoiding decisions. That's why I differ with Herb Stein's suggestion that the discussion of the BBA diverts attention from discussion of budget decisions.
       On the contrary, a constitutional amendment is the only thing that is going to force budget-makers to confront the tough decisions that are necessary. When you have unlimited borrowing, you don't have to choose between programs, or choose between spending cuts or raising taxes. Far from diverting attention from making choices, the amendment would force us to make choices.
       History also demonstrates the fallacy of the suggestion that a requirement for a balanced budget should apply to a five-year cycle instead of annual budgets. If there were a requirement for a five-year balanced budget,it's simply human nature that members of Congress, who naturally want to please people, would put off tough decisions to cut programs or raise taxes until the fifth year. That wouldn't work.
       The purpose of the amendment is to prevent regular, consistent deficit spending. What we ought to do, and probably will do under the BBA, is to accumulate modest surpluses each year. Then we would have the ability to draw down the surpluses when the country or the economy hits a rough patch.
       This idea of balancing the budget in five years wouldn't make it any easier to pass the proposed amendment in Congress. There is not one representative or senator who would vote for a balanced-budget amendment because it said the balancing act must be performed over a period of two years or five years instead of one year. We need solid answers. The BBA is a solid answer.

Robert Reischauer
2:27 p.m.  Thursday  12/12/96

       FORGET THE FANCY FORMULATIONS, LET'S GET ON WITH THE JOB

       Certainly the budget shouldn't and couldn't be in balance or at any other arbitrary level year in and year out. When a weak economy depresses revenues and pushes up spending on unemployment compensation, the gap between revenues and spending should be allowed to grow from where it was when the economy was strong. For some that might mean moving from a $150 billion surplus to a position of balance, for others it might mean moving from balance to a $150 billion deficit. If such fluctuations were not allowed, the severity of business cycles would be exacerbated, not ameliorated, by federal fiscal policy.
       While it might seem logical to adopt a law or a constitutional amendment requiring that the budget be at least in balance over a three- or five-year interval, such a rule would encourage gaming and would not solve the problem. A period would have to be defined. It could be a "rolling" period--that is, the rule could be that the budget actions for the current year would have to ensure that the average deficit for the current and previous four years did not fall below $0. Or it could be a "fixed" period--that is, deficits averaged over the 1994-1998 period must not dip below $0. But what would happen if the economy weakened in the last year of a fixed period when Congress had assumed that some of the deficits incurred in previous years would be made up by surpluses in the last year? Similarly, after four years of balance under a rolling-period system, a recession could hit, facing us with the same old problem. As Sen. Simon has pointed out, Congress puts off pain and pulls forward pleasure.
       The president and some economist have suggested that they could live with a BBA if it required that the structural deficit--the deficit that would exist if the economy were fully utilizing its productive capacity--be $0. But the structural budget deficit is a very judgmental and difficult-to-measure concept. Certainly it is not a concept that we would want to enshrine in the Constitution.
       Jim Miller's solution to the problem is to establish a "rainy day" fund made up of surpluses accumulated in the past that could be spent when the economy weakened. That would be better than the BBA formulation that was voted on by the 104th Congress, but the question before us is still, "Why does the nation need to put on a fiscal straitjacket when it seem to be curing its fiscal insanity slowly, with less drastic forms of self medication?
       Our moderator is correct to worry about our political system's proclivity to think that procedural changes are an adequate substitute for substantive changes. If a BBA were passed and sent off to the states for ratification, Congress could regress into a self-congratulatory mode and pass a large tax cut as a reward for its "tough vote." Members would argue that there was no need to worry about the deficit consequences of such a tax cut because the BBA would require action tomorrow.
       There has never been a great debate over the desirability of balancing the budget--or moving into a surplus position. The disagreement has been over how to get there--what programs to cut and what taxes to increase. Let's get back to the real issue before the nation, which is not what fiscal-policy goals the nation should aim for, but rather, how we should get to our objective. New procedures are not the answer.

Herb Stein
2:41 p.m.  Thursday  12/12/96

       In response to Miller's remark about my calming influence, let me point out that I am the moderator of this panel, not its agitator.
       Perhaps the agitation for the BBA by Simon, Miller, and others helped to force the government into the more responsible fiscal behavior of the past few years that Reischauer and Shapiro point to as evidence that we don't need the amendment. Can it be that the best solution would be continuous agitation for the amendment, but no amendment? Of course, Simon does not seem to concede that there has been any more responsible behavior. He is too modest.
       I am surprised at the scenarios the panelists give for what would have happened if there had been a BBA in the 1980s and 1990s. Simon refers to an estimate by the Concord Coalition that if the BBA had been in effect since 1980, income per American family would now be $15,500 a year higher than it is. I have much respect for the Concord Coalition, but that figure seems to be much too high. I doubt that the correct figure is one-third of that--which isn't hay, but there would have been some pain in getting there. Any comments on this estimate from others?
       On the other hand, opponents of the BBA do not draw a very frightening picture of the world with the BBA. Congress would presumably not have insisted on balancing the budget during the 1982 recession. For the 1980s and 1990s as a whole, defense spending would have been a little lower and taxes a little higher. The main casualty, apparently, would have been that the government would have spent more time in finagling and deception to avoid the appearance of deficits. No one says that if the BBA had been in force, we would not have had the Reagan defense buildup, and the Cold War would still be going on.
       Perhaps we can paint a bloodier picture if we look ahead to the next generation. By all accounts deficits will mount after 2002 to heights that all members of the panel would regard as disastrous, if something is not done. Will the BBA be necessary to avert that disaster? These future deficits are connected with Social Security and Medicare, and some attention is now being paid to putting the Medicare Part A Trust Fund and the Social Security Trust Fund on more solid footings. But few responsible people have yet faced up to the difficult decisions that will be required. And is there a danger that ways will be found to rescue the trust accounts that do not rescue the budget as a whole, but only shift costs into the general funds?
       I remind the panel that tomorrow, Friday, is their last day on this stage, and they should prepare to make their farewells and receive their curtain calls.