Tuesday, July 19, 2011

The Pitfalls of a Balanced Budget Amendment

Many on the right seem to believe that the balanced budget amendment, while a good idea, may face an uphill climb in terms of being enacted. I think, however, there are considerable reasons to doubt whether this amendment has merit as a policy aim. The principle of having a balanced budget is a worthy one. Fiscal prudence and discipline are important for any authentic conservatism, but the methods to achieve the end of a fiscally sustainable government also deserve some scrutiny.

As many admit, the term “balanced budget amendment” is itself a misnomer. The “balanced budget amendment” (BBA) currently endorsed by many Congressional Republicans not only requires that the budget be balanced but also stipulates, among other things, that federal spending cannot go above 18% of GDP without a 2/3 majority vote in favor, that taxes cannot be increased without a 2/3 majority vote in favor, and that a vote of 3/5 of both branches of Congress will be required to raise the debt ceiling. A 2/3 vote can also allow the budget not to be balanced. War can allow many of these majority requirements to be waived---with the notable exception of taxes, which would still require a 2/3 majority to be increased.*

An initial practical point: for conservatives interested in changing the tax system, the BBA would very likely make tax reform harder, not easier. Most forms of tax reform would require that taxes somewhere be raised (through the closing of various loopholes, say) in order to compensate for taxes being lowered elsewhere. A requirement for a 2/3 majority on tax increases would give a grand bargain on tax reform a much higher hurdle. Moreover, the BBA seems to put in place an utterly unconservative dynamic: it makes it easier to increase spending than it is to increase taxes, the instrument for paying for this spending. Even if current federal spending were to magically drop to 18% of GDP, current tax revenue is only 15% of GDP, so we would be left with over $400 billion in deficit spending. As we are under a time of military conflict (in Afghanistan, etc.), the government can ignore the “demand” that the budget be balanced.

Because GDP is a notoriously unmoored number, the requirement that spending cannot exceed 18% of GDP is built on sand. GDP for a year is often revised numerous times, so what counts as GDP for the purposes of the BBA? In a year in which spending is 18% of GDP and the GDP number is later revised downward, part of the budget based on that year's GDP might be deemed unconstitutional. Which part? This requirement could plant a bacterial trace of chaos in the budgetary system of the United States, one that could infect the whole of the federal budget.

Moreover, 18% is an entirely arbitrary number. According to the Office of Management and Budget, 1966, before Medicare really came into effect, was the last year where federal spending was below 18% of GDP. Moreover, every presidential administration since the end of World War II had years where federal spending was greater than 18% of GDP. It is unclear why this number should be set in stone.

History has another rebuke for the BBA: almost every presidential administration since 1900 would have had budgets that would have required a Constitutional override of a 2/3 vote. The only exceptions to this would be the presidencies of Harding and Coolidge, which ran surpluses for each of their years in office---though Coolidge’s presidency was also followed by the worst economic collapse in the twentieth century. The only Republican president in the postwar era whose policies led to at least one year with a balanced budget was Eisenhower. With the exception of 2001 (which was a partial carry over from Clinton-era budgets), every year of Nixon, Ford, Reagan, Bush I, and Bush II would run afoul of the BBA.

I cite history not because the past should always be the example for the future. But the past does have a significant role to play for traditional conservatism as it considers its policy aims. Federal debt has pretty much inexorably increased from 1900 to 2000, but the United States did not become poorer or radically less fiscally sound over this period. Provided they are sufficiently small, deficits do not seem likely to break the fiscal health of this nation. Moreover, the embrace of the principles of the BBA would seem to entail the rejection of the policies of every Republican and Democratic administration in the modern era, with the possible exception of Eisenhower, the only president in the modern era who ever ran a surplus and also presided over a federal government that was less than 18% of the GDP. And even Eisenhower’s administration ultimately increased the debt in raw dollars and had years when federal spending was over 18% of GDP. (There’s some irony to the fact that Eisenhower’s administration, more than any other, conforms to the principles of the BBA; many factions within the Tea Party movement, which has advocated strongly for this measure, can trace their ideological ancestors to the Birchers and Goldwaterites who rejected Eisenhower-style conciliation.) A total rejection of historical practical standards sounds less like moderating conservatism and more like an insistent radicalism.

An obvious rejoinder to these points is that the BBA gives a ready means of escape---that 2/3 majority that can override any of its requirements. Therefore, all past presidents could comply with the principles of the BBA, as long as Congress votes for overrides. However, this rejoinder implicitly weakens the case for the BBA by suggesting the ordinariness of seemingly extraordinary measures. The normalization of overrides could easily make public finances less sound and increase governmental inefficiency, as 2/3 of all members would have to be “persuaded” by subsidies, tax breaks, and pet programs. Rather than authentically restraining spending, the BBA may present another layer of political kabuki, and history has shown that the increase in those layers is closely correlated to an increase in enrichment for the connected and a decrease in real political accountability. It is unclear what would be gained---more clear is what could be lost---by having our government’s budget policies be run by 2/3 of the House and Senate.

The current incarnation of the balanced budget amendment falls into an error about which many on the right have traditionally pilloried the left: it substitutes legalism for virtue and prudence. We can balance the budget tomorrow if we want---by spending no more than we gain in taxes. Conservatives can cut spending if they want, though they seem to find this a challenging prospect when they actually take power. The Constitution already has a mechanism for a balanced budget, if our Congress and president want it. The fact that they have so rarely wanted it, and that the lack of a balanced budget has not always led to an economic or fiscal disaster, might give those sympathetic to prudential conservatism pause. This doubt might be reinforced by noting that the existence of balanced budget amendments in various states has not saved them in any way from fiscal turmoil. Indeed, California, perhaps the paragon of dysfunctional state finances, has operated under a balanced budget amendment for years. Passing constitutional requirements, in the case of California and other states, was a poor substitute for judgement in legislative and executive branches.

The fact is that some debts are worth incurring, while others are not. Sometimes deficit spending makes perfect sense; at others, it’s equivalent to a drug addict borrowing for a good time. Sometimes, some taxes will have to be raised; sometimes, some taxes will have to be lowered. Personal judgement and principled deliberation can help us realize those times---a set of paragraphs plugged into the Constitution will not.

*Other variants of this proposal are circulating, but their features, and their limitations, have much in common with the version discussed here.

(Crossposted at FrumForum)

No comments:

Post a Comment