Balanced Budget Amendments Are No Magic Bullet

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.

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About Pete Davis 99 Articles

Affiliation: Davis Capital Investment Ideas

Pete Davis advises Wall Street money managers on Washington policy developments that affect the financial markets. President of his own consulting firm since 1992, Davis Capital Investment Ideas, he draws on 11 years of experience as a Capitol Hill economist with the Joint Committee on Taxation (1974-1981), the Senate Budget Committee (1981-1983), and Senator Robert C. Byrd (1992). He worked in the House and Senate, and for Republicans and Democrats.

Davis brought the first computer policy model, the Treasury Individual Income Tax Model, to Capitol Hill in early 1974, when he became a revenue estimator on the Joint Committee on Taxation. He formulated the 1975 rebate, the earned income tax credit, the 1976 estate tax rates, the 1978 marginal tax rates, and the Roth-Kemp tax cut. He left Capitol Hill in 1983 for the Washington Research Office of Prudential-Bache Securities, where he advised investors for seven years.

Davis has long written a newsletter on the Washington-Wall Street connection for his clients; Capital Gains and Games is his first foray into the blogosphere.

Visit: Capital Gains and Games

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