The Phony Balanced Budget Amendment Debate
From the Fiscal Times July 15, 2011
Next week, House Republicans plan to debate a balanced budget amendment to the Constitution. Although polls show overwhelming public support, it is doubtful that many Americans realize that the measure to be debated is not, in fact, a workable blueprint to enforce a balanced budget. In fact, it’s just more political theater designed to delight the Tea Party.
Historically, those supporting a balanced budget amendment to the Constitution were only interested in balance per se. That is, requiring that revenues and expenditures be as close to equal as possible. The view was that if the states – almost all of which are required to balance their budgets annually – could do it then so could the federal government.
One problem is that the states don’t really balance their budgets. All have separate operating and capital budgets and only the operating budget is required to be balanced. By contrast, the federal budget lumps together operating and capital expenses, such as roads and buildings that will last for decades. Moreover, the states are notorious for using gimmicks to give the appearance of budget balance even though they run deficits.
Another problem is that there is a powerful enforcement mechanism that keeps states from straying too far from budgetary sustainability: the bond rating agencies. If they think a budget endangers the timely payment of interest or repayment of principal on state bonds, they are quick to downgrade them. This will raise interest costs immediately and bring heavy political pressure from bondholders, who will suffer from lower prices on their investments. (Bond prices rise when interest rates fall and bond prices fall when interest rates rise.)
The federal government does not face the same pressure from the ratings agencies as the states except in unusual situations such as the one we are facing today when Congress refuses to raise the debt limit. The rating agencies believe that since the federal government can, in principle, create money to pay its debts there is never any risk of default. Of course, bondholders may suffer a real loss of principal if too much money is created and inflation ensues. However, the rating agencies are only concerned with legal default.
Thus a big problem for proponents of a balanced budget amendment has always been how to enforce it. Lacking de facto enforcement from the rating agencies, there would have to be some mechanism whereby the courts could intervene to block spending or force tax increases for a balanced budget requirement to be operational and not just an expression of sentiment.
Not only is it a really bad idea to give unelected judges such power, it is not really practical. For example, until the last day of a fiscal year, it would be impossible to say, as a matter of law, that the balanced budget requirement had been violated. At that point, spending would have already occurred, and it’s not really feasible to tell people to send back some of their Social Security checks because the budget was unbalanced. And who is to say what spending was the amount that went above revenues and what wasn’t?
These problems are magnified by the balanced budget amendment Republicans plan to debate next week. As reported by the House Judiciary Committee on June 23, the joint resolution (H.J. Res. 1) would limit federal spending to “18 percent of economic output” unless two-thirds of the House and Senate vote otherwise.
Assuming such a proposition is a good idea, how practical is it? For one thing, the term “economic output” in not defined in the committee report. Presumably, it means gross domestic product. But this is not a term defined in law; nor could it be. GDP figures are constantly being revised as new data become available and economists change their concept of what it means.
Another problem is that Congress cannot know what GDP will be in the coming fiscal year and it must necessarily pass its appropriations bills before the fiscal year begins. This means, as a practical matter, that Congress must base its spending on forecasts of GDP, which are often wrong and sometimes by large magnitudes. And of course it is impossible to control spending on entitlements or interest on the debt on an annual basis.
Needless to say, the problem of enforcement is even greater than with the simple sort of balanced budget amendment that was previously under discussion. Yet Republicans held exactly one day of hearings on their proposed amendment and routinely assert that further discussion is unnecessary because the idea of a balanced budget amendment has been kicking around for decades. But no previous amendment has ever contemplated limiting spending to a certain percentage of economic output--and no state or foreign country has ever attempted such a thing.
If Republicans were really serious about putting a balanced budget amendment into the Constitution they would not have written an entirely new one that is radically and conceptually different from those debated in the past, with new language that constitutional scholars have not even begun to analyze. Republicans would have held weeks of hearings with such experts and planned many more weeks of floor debate. GOP think tanks would have been urged to hold conferences and publish studies of the proposed amendment.
None of this was done, of course, leaving the inescapable conclusion that this is nothing but a political ploy designed solely to appeal to the GOP’s Tea Party wing. The time wasted debating a balanced budget amendment would be better spent taking care of the House’s long list of unfinished business, such as passing appropriations bills.
My July 11 Tax Notes column discusses the unworkability of the Republican spending limitation amendment in more detail. I posted a copy at SSRN.