The Balanced-Budget Amendment

The Balanced-Budget Amendment

Nov. 30 2004 4:22 PM

The Balanced-Budget Amendment

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Jim Miller
9:23 a.m.  Friday  12/13/96

       Our exchange has pretty well summarized the differences of opinion on the BBA. As our moderator (vs. agitator), Herb Stein, has noted (and as Bob Reischauer has implied), a lot of the differences come down to: (a) how severe (i.e., costly) is the deficit problem?, and (b) how well would the BBA work (i.e., would it be effective?)?
       To summarize my view on these two questions, the deficit is chronic and will not disappear (and stay gone) unless the president and Congress are faced with a binding constraint. The existence of the "escape valve" of deficit finance leads to a federal government that is larger than optimal. By taking a major portion of domestic saving, the deficit "robs" the private sector of capital and, at the margin, raises interest rates. Both slow real economic growth. Because of "fiscal illusion," deficits burden future generations, making deficit finance a moral, as well as economic, issue.
       The BBA would be effective in restraining both the deficit and the size of government. Evidence from the states (e.g., the Crain-Miller multivariate analysis) shows this. Operationally, the BBA would not be without faults, but most states have a balanced-budget requirement, and they cope with ancillary imperfections quite well.
       Despite the "better numbers" for the BBA in the new Congress, I am not sanguine about passage. Hopeful, but not optimistic. The reason is that whatever their public positions, members of Congress are reluctant to give up their flexibility on budget matters, and it will be difficult for proponents to assemble the two-thirds vote in both Houses necessary to put the BBA before the states. I predict a close vote, with careful vote-counting beforehand and many "gimmes" (i.e., "I don't want to vote for this measure and I don't want to go against my party leaders, but I really must support it or my constituents will kill me.").
       We live in interesting and exciting times. (Which goes to show that it doesn't take much to interest and excite budget types.)

Robert Shapiro
9:53 a.m.  Friday  12/13/96

       PARTING SHOTS

       After so much recent amity, it's time to draw a line between my fellow scribblers and myself. The point on which we part company is fundamental: We all may be deficit hawks, but I know of no genuine economic reason for requiring an annual balanced budget. And using the nation's most basic and unchanging law to do so suggests to me an element of naive rationalism.
       Just to begin, the BBA assumes that we could actually know when real budget balance was achieved. In truth, the federal budget can be balanced only in a manner of speaking, because the bottom line is a creature of how budget laws define expenditures and receipts. Any clever junior partner in a big seven accountancy firm could reasonably redefine current spending and revenues to demonstrate that the federal budget is already balanced--or alternatively, that the deficit is astronomically high.
       As a matter of course, lawyers today redefine business transactions to take advantage of every permutation on the tax code. Wedge the BBA into the Constitution, and every interest group will hire accountants to recast their benefits in forms that will elude the terms of the amendment. And the countless conflicts of interpretation which will follow will clog the calendars not of IRS auditors, but every level of the federal courts. Moreover, these complication will pale before those that will follow when, as a matter of course, the fiscal policies of Congress and the president violate the Constitution.
       That said, it is still worthwhile to deliberately and actively promote the more general goal of fiscal discipline. Under normal conditions, for example, new government borrowing should be generally limited to financing long-term public investments that directly support future growth, and other public spending should generally grow no faster than the economy. And even without markers such as these, we can know when fiscal discipline is eroding by attending not to a budget rule in the Constitution, but rather to the health and movements of the economy itself.

Robert Reischauer
12:41 p.m.  Friday  12/13/96

       Has, as our moderator suggests, the threat that Congress might pass a BBA at any moment motivated members to accept difficult spending cuts and tax increases to reduce the deficit? I doubt it. On Capitol Hill, periods of BBA consciousness have lasted only the few weeks when the issue was before the Congress. Once defeated, thoughts of the BBA and its consequences have evaporated from members' minds as fast as drops of water on a red-hot skillet. Spending cuts and tax increases have been approved because most members and the president think that deficit reduction is the proper course for fiscal policy to follow.
       While both sides in this electronic debate have shied away from exaggerated claims, Sen. Simon's reference to the Concord Coalition's estimate that the average family would have $15,500 more income a year if the budget had been balanced during the 1980s and 1990s is a whopping overstatement. Deficits during the 1980 to 1996 period amounted to about $3.1 trillion. If all of this amount had been added to the nation's productive capital stock rather than spent on public-sector consumption and if this new capital had generated a 10 percent rate of return and if all of the return was received by families, then the increase in average family income would have been a bit over $4,400 in 1996. Of course, several of these assumptions (the ifs) are quite generous and, therefore, the $4,400 figure, crude as it is, represents an optimistic upper bound. It would matter, for example, how the budget was brought into balance. If genuine investment activities of the government were scaled back to attain balance, the income gain might be much more modest. Furthermore, participants in the budget debate must recognize that there is more to living standards, which is what we are all most concerned about, than GDP or cash incomes. If federal environmental activities had been curtailed to balance the budget, family incomes might have been higher but one nonmonetary dimension of living standards would have been diminished.
       When asking how a BBA might have affected outcomes in the 1980s, all of our educated guesses sketched out "most likely" scenarios. That does not mean that there would not have been a significant chance that the outcome could have been more catastrophic. The need to obtain a supermajority to allow a deficit could have led to budgetary gridlock, intervention by the courts, and a breakdown of government. Worse yet, individuals or small groups of members might have blackmailed the majority, withholding their votes until their favorite piece of special-interest legislation was approved. Some of these measures might have been very detrimental.
       The moderator is correct in focusing our attention on the budgetary challenge that will face the nation when the baby-boom generation retires in the second and third decades of the next century. The adjustments that will have to be made then will make those we have been engaged in recently look like child's play. But these adjustments will have to be undertaken over a three-decade-long period. Demographic forces do not hit the budget like the flood from a bursting dam, but rather like a steady rain. Responsible policy-makers don't need a BBA to introduce gradually the measures necessary to put, and then keep, the nation's fiscal policy on the proper course. We've been doing that for the past six years, and we should focus our efforts on continuing the effort.

Sen. Paul Simon
1:21 p.m.  Friday  12/13/96

       Herb Stein says that this must be our "farewell address" on this issue.
       My message is simple and clear: We have harmed our nation--and the world--with our heavy borrowing, an easy habit to continue for an individual and for a government. We put our future in great jeopardy without a balanced-budget amendment, first suggested by Thomas Jefferson.
       There are no popular ways to balance a budget, and those of us who hold elective office like to do popular things. We need some mechanism to force us to do the unpopular, and I know of nothing that will be as effective as a constitutional amendment. Without it, we are headed down the road of monetizing our debt.
       Adam Smith warned us in his Wealth of Nations that the history of governments is that they pile up more and more debt, find rational excuses for doing that, and then ultimately "debase their coins." They did not have paper money in those days. But we will know in real terms what he said if we don't stop our fiscal imprudence. And the way to stop it is a constitutional amendment.

Herb Stein
2:14 p.m.  Friday  12/13/96

       Our panelists have summarized their positions beyond my power to add or detract. I think that they have provided an excellent introduction to the subject. I say "introduction," because the discussion has unveiled many of the major issues but has not resolved them. Of course, there was no way that it could resolve them. The issues will be resolved in the democratic process, and later, in the test of time. I hope that when the debate moves to the floor of Congress next year it will be as well informed, as thoughtful, and as free of sloganeering as our discussion has been.
       I am not in favor of a balanced-budget amendment. I have made that clear in many writings and in testimony before congressional committees. I hope that my preference has not been too obvious or impaired my functioning as moderator of this debate. Given my position, it was natural that I should appreciate what Shapiro and Reischauer had to say, but I want to testify that Simon and Miller made as good a case for their side as I have ever heard.
       In my opinion, the decision about the size of the budget surplus or deficit is like the decision about the size of the defense program, the level of Social Security benefits or the rates of taxation. These decisions have costs and benefits that have to be weighed and adapted from time to time to conditions and national priorities. I don't think any of these decisions can be made in advance for all time to come. But I do think that these decisions can be made with more information, better analysis, and greater understanding than has been present in the past.
       I spelled out my views of all this seven years ago in a little book entitled Governing the $5 Trillion Economy. (That was when the GNP was $5 trillion.) I recommend it to your attention.
       In closing, I want to thank all the panelists most sincerely for a clear, thoughtful, and punctual expression of their views.
       I invite the readers to look for my personal reflections on "Talk, Talk, Talk ... ," to appear soon in S
LATE.