Don’t Link Debt Deal to Budget Amendment

May 9th, 2011 at 7:15 pm | 12 Comments |

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More than a few conservatives are floating the idea that the passage of a balanced budget amendment should be the price for raising the debt ceiling. Without seeing the particulars of any amendment, it’s impossible to get really specific but most of the proposals I’ve seen –requiring a balanced budget each year; requiring it while simultaneously imposing a tax cap, requiring the balanced budget and limiting federal spending to 20.6% of gross domestic product—have severe problems.

Balanced budgets, in general, are a good idea and the Republicans have been far too timid in moving towards one. (Not even Paul Ryan proposes one.) But, particularly absent a specific plan to balance the budget, a balanced budget amendment won’t do much on its own because it’s sure to have big loopholes, could actually prevent more sweeping budget process reforms, and may take up political capital that could better be spent on other things.

The loopholes first: Nearly all balanced budget proposals I’ve seen include a few loopholes—most prominently for “war”—and everyone agrees that this is a good idea. Would the United States have wanted to have its fiscal hands tied right after Pearl Harbor or even 9/11?  Although saying that the United States hasn’t had a “real war” since World War II is a favorite talking point amongst isolationists, it really isn’t true: Congress approved bills authorizing the Korean, Vietnam, Afghanistan, first and second Iraq wars.  In fact, by any commonsense definition, the United States is at war in Afghanistan, Iraq and arguably on the Korean peninsula.

Even though the more recent bills allowing the exercise of violence against foreign powers weren’t headlined “declaration of war” they had the same consequences as one and, if the matter came to court, it would probably be ruled that any “war” provision rendered the entire amendment toothless. On the other hand, a bill without a “war” exception would present severe problems of its own.

Other loopholes will probably emerge too: all states but Vermont have their own balanced budget provisions but some states with very strong legal language (California) never actually balance their budgets while some with weaker requirements (Virginia) always do so.

Second, even setting aside Keynesian ideas of pump priming and balancing the budget over the course of the economic cycle–while oversold on the Left, they’re not entirely worthless–a balanced budget amendment that required a year-to-year balance in the budget could actually be an impediment to more extensive and beneficial budget balancing methods.

In principle, there’s a good case for running a surplus each year on an operating budget that would cover salaries, entitlement benefits, interest on debt, military operations and the like but financing many public sector capital investments—roads, bridges, rail lines and military hardware—over the long term.  These things get used over the long term and, provided interest rates aren’t too high, it makes eminent sense to pay for them over time.

To do this, Congress could create a unified national capital budget which would balance itself only over the long term (and then with help from operating budget surpluses in good times) to replace the uneasy patchwork of perennially under-funded “trust funds” and yearly appropriations the nation currently uses for capital costs. In fact, issuing this kind of debt is probably a necessary function of government: even jurisdictions like Colorado, Arizona, and the Canadian province of Alberta that say they are “debt free” still issue it. (Debt just refers to “general obligation” bonds that commit the jurisdiction’s “full faith and credit.”)  But the wording of most balanced budget amendments I’ve seen probably won’t allow this type of financing.

Finally, even if an amendment were to be ratified by the states, it would obviously not solve deep budget problems.  Right now, neither party has presented a credible proposal to bring the budget into balance any time in the next 20 years. Actually getting to a balanced budget any time soon—which everyone favors in theory—will require doing things like raising taxes, cutting entitlement benefits, and slashing defense spending; things both parties are reluctant to do in practice. Thus, by pushing for an amendment rather than true substantive changes (particularly entitlement reform), those who favor an amendment promise to spend lots of political capital without substantive changes.

A balanced budget is a good idea and the nation should work towards one. It’s possible that some formulation of a balanced budget amendment could even help get Congress there.  But the current proposals for balanced budget amendments have enormous problems.


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12 Comments so far ↓

  • Sinan

    What is the nature of our national debt? It is made of short term and longer term notes paying interest with a maturity date. The reason we sell bonds is because we have two problems. One, we need money every day and borrowing short term is a great way to smooth out the lumpy revenue streams we have going into the Treasury from various taxes and revenue sources. Think of this like a pay day loan which you pay back every payday plus interest. The other reason is that you know your short to medium term revenue cannot cover expenses so you borrow on longer terms. This accumulates over time unless you get a windfall to pay it off. The nation was in a position to retire this debt load when Bush was elected. He could have taken the surplus revenues and paid off all high interest long or short term debt just like any household does when they win a lottery, get a big stock win or sell a house for profits. But that his not what he did. He made the political move to tell the nation that excess taxes were to be refunded to them while ignoring the fact that the same public had accumulated a national debt in the trillions. This purely selfish and foolish policy was accompanied by even more spending which prompted even more borrowing while tax rates decreased in parallel. This fiscal insanity led to an asset bubble because the credit markets were also allowed to increase personal debt beyond anything a reasonable household could carry in the long term. Any financial planner faced with a household that acted like this would instantly know the cure. Stop spending, make more money and pay down debt or face disaster. Now this simple advice does not really relate to a government that can create money by fiat or by monetary policy. However, the logic still applies in that sooner or later the call is made by Guido, the resident enforcer to pony up or we break your legs.

    So, now that we are in this socalled crisis created by our own foolish policies and behavior, what is the prudent thing to do? Well, the government gets revenue from economic activity. If economic activity decreases, they get less money which makes the debts even harder to retire or avoid. What if you increased your revenue first by repealing tax cuts, closing loopholes and forcing fiscal responsibility upon every citizen including the poor? This shot of cold water may actually allow the nation to then get a handle on expenses. This is what the left is trying to get the nation to understand. I hope they convince enough sane people to be rational or my kids will inherit a disaster from us.

  • sweatyb

    Nearly all balanced budget proposals I’ve seen include a few loopholes—most prominently for “war”

    Why should the war in Iraq be more worthy of budgetary rule bending than dealing with long-term unemployment?

    The concept of a balanced budget amendment is premised on the idea that we cannot trust the people we elect to do their jobs. Please remind me why we elected them in the first place?

    I’m proposing a constitutional amendment that would make the voters actually hold their elected representatives responsible for the sh*t they pull.

  • Houndentenor

    Why can’t people see what a stupid idea this is? Imagine a balanced budget amendment were to be ratified (far-fetched, but endulge my hypothetical). What then happens when some future Congress fails to comply with the rules set forth in that amendment? Would “unelected judges” decide what spending to cut or which taxes to raise?

    If Congress wants to balance the budget, then it should do so. A Constitutional amendment is just a political trick.

  • rbottoms

    “Don’t Link Debt Deal to Budget Amendment”

    Don’t vote for idiot Republican teabaggers.

    Fixed.

  • Non-Contributor

    “The reason we sell bonds is because we have two problems. One, we need money every day and borrowing short term is a great way to smooth out the lumpy revenue streams we have going into the Treasury from various taxes and revenue sources.”

    The reason the US sells bonds is because by law appropriations require the treasury to sell bonds in equal amounts and short term bonds are sold to clear excess bank reserves. But in 2009 Bernanke allowed interest on reserves meaning that selling bonds for clearing reserves are no longer required. So if congress just changes the law about selling equal amounts of bonds for appropriations the treasury could cut way back on the bonds being sold.

    BTW: in case you didn’t know this but the Fed sets the rates. No, not the market. Bill Gross whines about that almost everyday.

  • TJ Parker

    Hey, lets sell Texas back to Mexico! Ka-Ching!

  • mickster99

    So if a balanced budget is good idea why did the Bush/Righwingers almost double the national debt while Frum was working hand in glove to sell it to the usual dim bulbs. Clinton did a great job creating surpluses only to have the ideologues of the right punt it into oblivion with their blind OCD mantra of tax cuts no matter what the deficits are. And oh yeah wars are free as well as Medicare drug Part D. Oh yeah. Tax cuts pay for themselves say the current teabagging wingers in Congress.

  • rockstar

    A VAT tax would promote saving instead of spending. Why didn’t anyone think of proposing this when the Dems ran the whole show?

    • ram6968

      maybe you should google “fair tax” and read up before you type silly stuff

  • rockstar

    @ TJ Parker:

    How can we help Baja Arizona come about? I mean, like, TODAY….

  • medinnus

    Well, you see, the small-government mantra is only useful when Democrats are in control.

    With a balanced budget, the GOP can’t cut social programs they don’t have the votes to repeal in the name of fiscal responsibility, blaming the deficits they ran up in the first place.

    First clue the GOP as a whole isn’t serious? No military cuts.