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Balanced Budget Amendments Are No Magic Bullet

22 Jul 2011
Posted by Pete Davis

Some of us are old enough to have grown up watching The Lone Ranger. When Tonto handed The Lone Ranger the silver bullet, you knew he would shoot the gun out of the bad guy's hand with one shot, and all would end happily. Lately, Congress has been awash with balanced budget amendments (BBAs) to the Constitution. In my opinion, there are no silver bullets when it comes to balancing the federal budget.

That said, there are several levels of balanced budget amendments, and, late yesterday, Rep. Justin Amash (R-MI) introduced one of the better ones, H.J.Res.73. It would limit federal spending to the average of revenues collected over the past three years adjusted for inflation and population growth. A waiver for up to one year could be approved by 3/4 of each house of Congress. Unlike other BBAs, it would devote surpluses to reducing the federal debt and would provide a 10-year transition from today's unprecedented deficits to balance. It would also provide for enforcement through subsequent legislation.
There are four major problems with balanced budget amendments.
First, a BBA wouldn't be enforceable. Who would go to jail if a deficit appeared? What would be the remedy? Any attempt to enforce a BBA would have to be taken by the President, but if he or she didn't act, or if Congress wouldn't pass the President's remedy, what would the Supreme Court do? It's hard to imagine unelected Supreme Court justices raising taxes or cutting spending. How would they choose what to cut and who to tax? It's also not obvious that the Court would hear a case in the first place because no one would have standing to sue. Only injured parties can sue and proving injury from a deficit would be nearly impossible. Supporters argue that members of Congress would have standing and that laws can be enacted to enforce the BBA so it wouldn't have to go to the courts.
Second, BBAs would put economic policy in a straight jacket as explained in this recent letter from five Nobel Prize winning economists. When the economy plunges or a national emergency (think energy price spike, flu epidemic, or major terrorist attack) forces a deficit, you need to allow that deficit to avoid worsening the downturn. Economists say you should balance the federal budget over the entire business cycle for that reason: running surpluses in good times and deficits in bad times. Unfortunately, life is more complicated than that, and few political leaders would admit good times had arrived, so spending should come down and taxes should go up. That would be a prescription for electoral defeat. Furthermore, the sudden arrival of a deficit would be the wrong time to tighten fiscal policy. Doing so would worsen the economy and the deficit in the both the short-run and possibly in the long-run. Here's an economic analysis finding the short-run costs would outweigh the long-run benefits.
However, BBA supporters have plenty of history on their side. Washington's fiscal irresponsibility stretches back over the past decade when tax cuts, Medicare Part D, and the Iraq and Afghanistan wars weren't paid for. Prior to that, the federal budget was not balanced from FY69 until FY98 through several business cycles.
Third, as the Nobel economists point out, you should balance the operating budget of the United States, not including capital investments, R&D, education, and environmental protection. Balancing the federal budget as it is currently defined would rob the economy of the investments upon which future growth would depend. However, recent experience with the $787 billion stimulus bill raises serious questions about how vital federal investments are. Calling something an investment doesn't mean it will pay off.
Fourth, a BBA would encourage more budget gimmickry, creative federal accounting, and unfunded mandates on the states and on business. Loyola Law School Professor Theodore P. Seto has an excellent and very balanced paper on this which can be downloaded without charge here.
A detailed comparison of the House BBA, H.J.Res.1, and the Senate BBA, S.J.Res.23, by the Heritage Foundation's Brian Darling is here. More background is here. In 1995, a BBA passed the House and nearly passed the Senate as chronicled here. This December, 1996 discussion among Herb Stein, former OMB Director Jim Miller, former CBO Director Bob Reischauer, former Commerce Under Secretary Rob Schapiro, Senator Paul Simon (D-IL) is very well informed. Be sure to click on all six installments. Pro analysis from the Heritage Foundation is here. Con analysis from the Center for Budget and Policy Priorities is here.
If you're one of the few who missed Bruce Bartlett's July 15th article on BBAs, it's a must read here.
Finally, we balanced the federal budget for four years, FY98-FY01, without a BBA, so it can be done without a constitutional amendment. It just took 17 years of repeated spending cuts and tax increases starting in 1982 to get there.
In my opinion, when the voters decide its time to balance the budget, they'll elect members of Congress and a president who will find a way to do it. There's no substitute for backbone when it comes to balancing the budget.

You don't understand why the

You don't understand why the Republicons want the BBA. The surpluses Clinton left for Bush were enough to pay off the 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 Bush inherited was made up virtually 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 failure to do so simply permits the Republicons to steal the money contributed by workers for their retirement.

The BBA guarantees that workers can never get their money back.

"The surpluses Clinton left

"The surpluses Clinton left for Bush were enough to pay off the entire US debt"

What surpluses? Unfortunately, the surpluses at the end of the 90s were entirely dependent on the internet bubble economy; those CBO projections showing trillions in future surpluses were worthless after the bubble collapsed. Now, cutting taxes in a recession was stupid from a deficit perspective, but regarding fanciful projections as somehow reflecting reality is not useful either.

So I guess Bush's first big

So I guess Bush's first big lie was that he wanted to return the "surpluses" back to the tax payers. Regardless the permanence of Clinton's surplus, Bush's use of SS/medicare surpluses to reduce income taxes guaranteed that income taxes would have to be raised to pay back the SS/medicare trust funds; and the Republicons balanced budget bill/amendment steals those trust funds.

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