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We have stared hard into the abyss of a national default, and the close call with financial Armageddon is starting to make a balanced-budget amendment look good.
A stringent restriction on public borrowing, if properly crafted, offers the hope for more fiscal responsibility, less wasteful spending and a slightly less terrifying budgetary process. Yet while a well-crafted amendment looks a little better, there are enormous challenges in creating a sensible measure that balances fiscal restraint with the ability to adapt to new circumstances.
Balanced-budget amendments have been in circulation for decades; Minnesota Representative Harold Knutson proposed a constitutional limit on borrowing back in 1936. In 1982, the Senate approved an amendment requiring that “prior to each fiscal year, the Congress shall adopt a statement of receipts and outlays for that year in which total outlays are no greater than total receipts,” but that proposal died in the House. In 1995, the House passed an amendment requiring that “total outlays for any fiscal year shall not exceed total receipts for that fiscal year;” it failed in the Senate.
The possibility of a balanced-budget amendment is back, and the case today seems a lot stronger than it did in the 1980s and 1990s. I rarely favor changing the Constitution, which can lead to fits of folly like the 18th Amendment that brought about prohibition. Moreover, Congress can run a balanced budget any time it wants simply by cutting spending and raising taxes.
Throughout most of my life, the debt has seemed manageable and the budgetary process seemed to work, more or less. The robust deficits of the Reagan era were reduced with a bipartisan deal signed by President George H.W. Bush. During the Clinton years, the combination of a centrist Democrat who cared about bond markets and an empowered Republican House led to budget surpluses.
During those years, it seemed clear that deficits were rarely the real enemy. The big social costs from big government came from wasteful spending, not from financing that spending with taxes today or tomorrow. If you spend $100 million on a bridge to nowhere, it doesn’t much matter if that bridge is paid for with taxes or debt.
The best argument for balanced budgets is that forcing governments to pay for their spending with current taxes will produce less wasteful spending. The past decade has done much to illustrate the allure of spending without taxation in Washington. The rotation of the parties was supposed to cycle gently back and forth between Democratic generosity and Republican thrift, but that model disappeared in the 1980s. Instead, Democratic taxing and spending is succeeded by Republican spending and not taxing.
And it’s hard to give any government much credit for cutting taxes without cutting spending. That’s not political courage; it’s pandering.
If we were confident that federal spending was delivering great bang for the buck and that the U.S. was going to be much richer in the future, then perhaps high interest payments could be accepted as the cost of a better tomorrow. But there is plenty of federal spending that could be cut, such as agricultural subsidies, new highway construction and subsidies for homebuilding in Texas. Surely, not every dollar of defense procurement is absolutely necessary.
Another reason to favor more federal fiscal restraint is that we could use a better balance between state and federal spending. Over the past 50 years, the federal government has become heavily involved in financing infrastructure, even when those projects overwhelmingly serve in-state users and could be funded with user fees. Why is it so obvious that the federal government has a role in funding rail between Tampa and Orlando, or a big tunnel in Boston?
Washington’s prominence is explained primarily by the federal government’s ability to borrow, and not by any inherent edge it has in infrastructure development. Federalizing expenditures breaks the connection between the projects’ funders and the projects’ users. Any instance when we’re spending other people’s money is an invitation for waste.
States and localities saddled with balanced-budget rules are relatively parsimonious and spend a fair amount of time debating even relatively modest public investments. That’s far more desirable than the federal government’s freedom to distribute billions without imposing taxes on voters.
Responding to Downturns
The current system’s pathologies should leave us open to the possibility of a new budgeting procedure, but the literature on state balanced-budget rules teaches us that the devil is in the details. In many cases, the state rules have weak teeth, and do little. When they do work, they can seriously constrain a state’s ability to respond to downturns.
During the recent collapse, the federal ability to borrow has thrown a lifeline to local governments, leading to greater preservation of important local services, such as education. Although the federal government could benefit from a little less budgetary freedom, the states either need more ability to borrow during downturns or more investment in rainy-day funds.
Any federal balanced-budget amendment should allow the government to spend more than it collects in taxes during wars and recessions, with the understanding that it will spend less during peaceful times of plenty. If the budget is to be balanced, it should be balanced over the business cycle, not year by year.
State of Emergency
But the crafting of such an amendment won’t be easy. The most natural out, perhaps, is to allow Congress to declare an economic emergency, which would temporarily eliminate the budgetary straightjacket. But then what’s to prevent lawmakers from declaring a perpetual state of emergency?
Another worry is that freezing the federal ability to borrow will create more pseudo-borrowing through semi-public entities, such as the mortgage lenders Fannie Mae and Freddie Mac.
I dreaded the prospect of default and would love to see a system that ensures the books are regularly balanced except during extreme times. A balanced-budget amendment might make that happen, but it would have to be done right. It would be far better if we could just count on Congress to live within its means, but the fiscal experience of the last decade has made such optimism untenable.