StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



The Phony Balanced Budget Amendment Debate

17 Jul 2011
Posted by Bruce Bartlett
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.
 
Addendum
 
My July 11 Tax Notes column discusses the unworkability of the Republican spending limitation amendment in more detail. I posted a copy at SSRN.

Amen

Amen!

Let's elect adults in 2012.


I'm all for that. Where are

I'm all for that. Where are they?


DoD Capital is Impedimentum

It is almost impossible to separate the DoD's "capital" budget from the operating budget.

For example the capital side of the Littoral Combat Ship is tiny compared to the bow wave of operating funds needed to make up for 'saving money' by not addressing corrosion between the aluminum hull, sea water and the steel engineering sections.

The F-35 capital budget is a quarter trillion bucks, but trying to use it will cost between a trillion and three quarters of a trillion over 20 odd years.

The Ford class aircraft carriers are $35B for two ships, but see the issues with Littoral Combat Ship, and that does not include the airplanes and support ships to keep the carrier "safe" at sea from non existent navies.

Then the Army devising expensive measures for a armored brigade to operate out of Samarkand supported totally by an Air Force/Boeing air birdge and using all the fancy 'cloud' technology that don't work.

The balanced US budget is only piossible by firing all the war fiction writers.


Questions again

"Hi, again Bruce, this post brings more questions. I've been reading that book "The Great Treasury Raid," since you mentioned it in that Forbes article. In that article you mentioned how Kennedy sent a letter to congress telling them to close certain loopholes alongside his big tax cut. Of course, this was ignored. By 1979 the effective tax rate for the top 1% was 37% (see source here http://lanekenworthy.net/2008/01/14/taxes-at-the-top/), and went down to about 25% in 1981. When the 1981 tax cut was put together, were Kennedy's loophole requests known about and factored into the bill (were some outlets closed), or were the same flaws that the '64 bill had in it in the '81 bill too? If they were in there, was there a reason for doing so, and why would it have helped?
By the way, a comment on Capital Gains and Games said the following: Congress consistently approved less spending that Reagan requested in his budget proposals. So the notion that Reagan was suckered into agreeing to the 1982 tax increases based on the idea that spending would be cut is ridiculous. Spending *was* cut below the level Reagan wanted.

This runs contrary to what you said in your book: Is he right or wrong? If you are right, could you verify it with a source other than Reagan (always good to rely on a neutral party)? If not, could you point me in the direction of somewhere that I could verify it for myself? I'm not calling you a liar, I'm just confused about all of this and wish to learn. If you can't answer my questions, just say so. Or could you give me some other place to contact you so you could answer them at length?"


phony Budget amendment

All this time could have been spent trying to reform the budget process by at least making the effort to break down the Federal budget between capital and current spending. While there are many many instances of how the line is blurred between capital and operating anything is better than the current process which invariably ends up cutting precisely those things that have the best possibility of a return in the future. Nothing highlights that better than continued spending on Medicaire rather than Head Start. As somebody soon to join the ranks of the retired we will be drawing down resources rather than contributing them. Head Start spending at least improves the potential of those expected to make a net contribution.; ANy society that prefers spending money on those at the end of their lives over those at the start of their lives is a society heading one way- down.


The Persistant Delusion of Motive

Let's burn the churches to save the churches. No, that cannot be right; what is their motive? What are they thinking? There is no motive and there is no thinking behind the GOP behavior - theirs is operant conditioning. The Tea Party has trained the pigeons and the rats to run the maze, peck the lever and dance in a circle to get the food pellets. On the rational side of the house we have been conditioned to write comments on blogs. The people in the middle have been programmed to ignore us and watch Jersey Shore. We all behave like slaves without masters.


This is all about stealing

This is all about stealing middle class retirement funds. The surpluses Clinton left for Bush were enough to pay off entire US debt by the time that the Social Security/Medicare trust funds would have to be amortized for beneficiary payments, all without having to raise taxes to pay for the amortization of those trust funds. The surplus Clinton created was made up almost entirely of excess payroll taxes building up the trust funds. Bush took those excess payroll tax receipts and gave them as heavily weighted tax reductions to the wealthy--who didn't create those surpluses in the first place. By doing this, Bush guaranteed that taxes would have to be raised in order to amortize the trust funds. The 18% limit on taxes simply permits the wealthy to steal the money contributed by workers for their retirement.


One more insanity with the budget

The amendment also requires that all tax increases, any and all for whatever reason, take 3/4 of both House and Senate to pass. That's not balanced per se either. A PAYGO-type insert might work but not language that makes tax cuts easier and tax increases harder (vice versa should be the case).


Political attack ad ammo

Bruce is right that this is a bill about a very important issue that requires careful thought and debate and consideration. It is also a hot button issue for the fiscal right. When you see a shoddy bill proposed and rushed through, what does that mean? Assuming the proponents are not just idiots, what do they get out of it?

If it's poorly written, it's very likely it won't pass. You'll lose the moderate vote because the implementation is so bad. The moderates in this case will be Democrat. As an amendment, the Republicans have no chance of getting the 2/3 vote without the moderates, guaranteeing failure. So you have a poorly written bill which superficially solves a hot button topic that one side can safely vote for knowing it won't get passed. What does that get you?

Political attack ad gold.

"Congressman X voted against the Balanced Budget Amendment! Congressman X is fiscally irresponsible. Why doesn't Congressman X want a balanced budget? Congressman Y voted FOR the Balanced Budget Amendment, but tax and spend liberals like Congressman X want to throw your hard earned money away. Why does Congressman X hate Americans? Paid for by Friends Of Congressman Y."

The major news agencies won't report on how badly the amendment is written, they'll report on the controversy it's creating. The electorate won't listen to reasoned argument about why Congressman X didn't vote for the amendment, they'll hear the attack ads. This isn't just pandering to the Tea Party, it's a carefully calculated failure.


Bruce- one way to solve the

Bruce- one way to solve the problem of GDP projection is to cap spending based on the trailing year's GDP. In this case they'd probably want to bump the cap somewhat to account for the fact that the economy will, on average, grow from year to year. So maybe 19% instead of 18%.

As for "which measure of GDP to use" you could delegate this task to some council of economists. For instance the NBER.

My personal view is that while the budget should be balanced in the long term it would be disastrous to attempt to balance it on a yearly basis. Spending would shrink during recessions and expand during growth periods; the exact opposite of what one would want.

One possible modification to the Republicans' plan that could address this is to cap spending based on a trailing average of real GDP for the past N years. Maybe N is 5. Again, since the economy will on average grow, you'd want to adjust the cap upwards. This would allow for the government to run deficits during recessions, but would likely result in surpluses during growth cycles.

If no special dispensations were made for defense spending, another happy side effect of such a cap would be to force politicians to deny voters the benefit of domestic spending in order to finance overseas military action. IMO this would raise the threshold of "political will" necessary for the U.S. to engage in foreign wars since it would no longer be possible to mask their true cost by financing them on credit.


Small Government Amendment

Someone should ask these dopes whether they would also support a spending floor. It makes about as much sense policy-wise as a ceiling does.

Also, they are being very misleading when they say 18% GDP. IIRC, the proposal calls for spending to be 18% of the *previous year's GDP*. Under normal rates of growth of three percent, you'd get spending of around 17.4 % of current year's GDP.


Solutions Anyone?

Wouldn't it be refreshing to read just one editorial or blog that proposes a solution to what ails our economy and/or those who are running it into the ground? Writers from all walks, liberal, conservative, and "radical independents" love to dissect and criticize, thereby avoiding saying anything substantial.

Our country's budget and spending problems are large, some say at this point, insurmountable. This has been said in the past, and such comments are soon forgotten with as few as two or three years of economic productivity.
This blogger expends a lot of words explaining why a balanced budget amendment isn't workable. What, he argues, would be the measuring stick for "economic output"; would it be last year's GDP or a forecast of next year's? What would actually comprise the defined "GDP"? Then he explains why, in all reality, we can never have a workable balanced budget amendment. He goes on to explain how the Republicans are simply and only pandering to the Tea Partiers by floating the idea of a balanced budget amendment.

While he suggests the Republicans should have (had) extended hearings on the balanced budget concept he offers nothing in the way of proposals for defining GDP or establishing methodology for achieving a balanced budget.

The beauty of Congress and its ability to write legislation and amendments lies in its power to define terms, measures and measurements, and standards of all kinds. (Yes, Congress gets to make the rules, let's have them do just that.) Treasury has the wherewithal to establish for Congress a usable definition of GDP. Let Congress and Treasury establish the meaning of GDP for balanced budget purposes, and the criteria under which the definition can be altered in the future. Let Congress establish the line between operating and capital expenditures, and don't belabor the discussion with all the grey areas. They exist, we know they exist, and the accounting world has been dealing with these matters for decades. From there, Congress can then construct a balanced budget amendment using the previous X number of years' rolling, average GDP (as defined by Treasury) for the measure of economic output. For-profit companies have been balancing budgets for centuries, with or without the above-mentioned percentage of "economic output" restriction. Take away the economic output measure and simply peg the next year's budget to the previous year's income. Real world stuff. An oversimplification, maybe? But it's a start and is far more than this blogger has proposed. My point is, balancing the budget is complex but is is most certainly not the impossibility presented by this blogger.

All this talk about how difficult balancing a budget is, is simply an excuse to not do the heavy-lifting required to solve this conundrum. Writers and talking heads, whatever their ilk, need to either shut up, or start proposing something constructive for a change. All the noise to this point hasn't solved a thing and does nothing to promote an atmosphere of getting things done. We the people need to start insisting that all who govern and those who write about it behave like grown-ups, stop talking about what we can't do and start addressing what we can do. Pollyanna? Not really; what has been going on in the "media" and in Washington hasn't worked. Formulating workable solutions might produce results; it's worked before.


Amendment required, but not to balance budget

We have to do something to moderate the rate of borrowing, even though the balanced budget amendment is a step too far. I propose that we limit the amount of time a Congressperson can serve in Congress while running up debt. We keep a running total of the debt incurred while each member of Congress has served. As soon as the total debt exceeds the total federal outlays for a particular year, they become ineligible to serve in Congress from any state or district until two elections have passed. This serves the purpose of being self-enforcing and does not attempt to codify particular justifications for borrowing. It also does not attempt to limit future Congresses.

So if Congress borrows only 5% of its budget every year, its members could serve about 20 years. If they balance the budget, they could serve for life. But if they run up 40% deficits, they would be out of office in three years or so. The only way to influence the behavior of Congress is to threaten their incumbency.




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