It Could Cause A Host Of Problems

By Robert Greenstein

In 1919, Congress approved the 18th Amendment to the Constitution, outlawing alcoholic beverages. The amendment was well intentioned but unwise. In 1933, it was repealed.

Prohibiting budget deficits in 1997, like prohibiting alcohol in 1919, has broad appeal. Business, families and states balance their budgets, we're told. Why shouldn't the government? But like the 18th Amendment, the proposed balanced budget amendment would cause serious damage to the nation.

Action to shrink the deficit is needed. Since 1985, Congress and three administrations have responded by cutting the deficit, measured as a share of the economy, by 70 percent. Most Washington observers expect a bipartisan agreement this year that balances the budget by 2002.

But there is a big difference between altering policies to achieve budget balance by 2002 and changing the Constitution. The proposed constitutional amendment would outlaw deficits. Only when three-fifths of both houses of Congress vote to authorize a deficit could one occur. Such a rule would make recessions more frequent and deeper.

Why? When the economy turns down, incomes and employment fall. As a result, the government's revenues (which are levied primarily on incomes) decline, while costs for unemployment insurance rise. Consequently, the budget deficit grows. By contrast, when the economy booms, revenues increase and unemployment costs fall -- and the deficit shrinks.

If the budget must be balanced each year regardless of the health of the economy, much deeper budget cuts or larger tax increases will be needed to eliminate the deficit in years the economy is weak than when it is strong. This is the opposite of what should be done to stabilize the economy and avert recessions.

Today, when the economy declines, the ensuing reduction in tax collections and increase in unemployment benefits help to bolster consumer spending and thereby to brake the economy's slide. To cut programs or raise taxes enough to balance the budget when the economy is sputtering -- thereby reducing consumer purchases -- is a prescription for tipping a faltering economy into recession and turning mild recessions into deep ones.

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The amendment allows the requirement for budget balance to be waived when three-fifths of Congress so vote, but that doesn't solve the problem. The Congressional Budget Office has rarely, if ever, forecast a recession in advance. It will likely prove impossible to amass a three-fifths vote until the economy is already in a recession and the budget balance requirement has caused considerable damage. This is one reason most economists, including many conservative economists such as Federal Reserve Board Chair Alan Greenspan, oppose the amendment.

The amendment also would be inequitable to younger generations. The Social Security trust fund is building a surplus that will reach $3 trillion by 2019. Then, as the baby boomers retire, this surplus will be drawn down to help pay their Social Security benefits. This approach -- paying now for part of the benefits the baby boomers will receive when they retire -- is essential if we are to avoid overtaxing those who will be working when the boomers grow old. The balanced budget amendment, however, would effectively outlaw this sensible approach.

The amendment requires that all government expenditures in any year -- including the costs for Social Security benefits -- be paid for with taxes collected in the same year. This bars  pre-funding part of the benefits for the baby boomers. It would mean instead that when the bulk of the baby boomers retire after 2020, workers would face sharply higher payroll taxes to pay for the boomers' Social Security benefits.

Still another problem is that the amendment would alter the Constitution to require more votes to make any change in the revenue system -- including a change to close a tax loophole, such as a tax break for powerful oil companies -- than to cut education, environmental programs, Medicare, Social Security, aid for handicapped children, or anything else. In this way, the amendment would protect special interests at the expense of the public.

A word about families. The claim that the amendment would require federal lawmakers to budget in the same way families do makes a nice TV sound-bite but is no more honest than most campaign ads. Families do not consistently limit their expenses to the amount they earn in the same year, without borrowing.

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To the contrary, families borrow when they buy a home (a mortgage is a large loan) or send a child to college. If a family had to budget by the rigid rules the constitutional amendment would impose on the government, the family would have to pay for the full cost of a home or college out of the same year's income.

The amendment also would bar the federal government from building up reserve funds in good years and drawing them down in bad years, a practice nearly all states use (and most families as well -- families save in advance for retirement and draw down the funds when they stop working).

No modern industrial nation -- and none of our major competitors -- impose upon themselves the rigid straightjacket the constitutional amendment would place on us. Lastly, the amendment isn't needed. For our nation's first 200 years, we ran large deficits only in wars or recessions. This changed in the early 1980s when a large tax cut failed to pay for itself as hoped and deficits spiraled. But since 1985, Congress and three administrations have worked hard to put the deficit genie back into the bottle. The deficit, measured as a percentage of the economy, is now at its lowest level since 1974.

A bipartisan agreement to balance the budget by 2002 is now within reach. We should seal that agreement and follow with reforms to restore long-term fiscal integrity to Social Security and Medicare. But adopting a constitutional amendment that risks making recessions deeper and more frequent, destablizes Social Security and ultimately leads to heavy payroll tax increases on younger generations, and favors special interest tax loopholes over education, the environment, and the elderly is not a prudent path to follow.

Greenstein is executive director of the Center on Budget and Policy Priorities.

On Balance,
A Good Idea

By Daniel Mitchell

After coming within a single vote of passage in the last Congress, the balanced budget amendment to the Constitution is back for another try. Politically, the amendment will again face an uphill battle in Congress, especially since the Clinton Administration has vowed to defeat it. But politics aside (which is where they should be), the amendment remains crucial for America's fiscal health.

For much of American history, Congress kept government debt under control. On those rare occasions when budget deficits did occur -- almost invariably due to war or economic downturns -- lawmakers would approve budget surpluses in following years. Unfortunately, beginning in the 1930s and culminating in the 1960s, this strong sense of fiscal responsibility gave way to the pernicious view that deficit spending was actually good for the economy. The result:

• The annual budget today is nearly eighteen times larger than it was in 1960. In inflation-adjusted dollars, government spending has tripled.
• In the years since 1960, the budget has been balanced only once. Deficit spending over that period has increased the official national debt from less than $284 billion to nearly $5.5 trillion.
• Interest payments on the debt now consume about $240 billion annually, more than the combined budget of the Departments of Commerce, Agriculture, Education, Energy, Justice, Interior, Housing and Urban Development, Labor, State and Transportation.

In the future, the debt problem will only get worse. The government's current debt calculation fails to include the $10 trillion to $20 trillion worth of unfunded liabilities (promises to pay future benefits) for Social Security, Medicare, government-employee retirement and other programs. In short, we will soon long for the days of $200 billion deficits unless something is done.

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The balanced budget amendment is a straightforward proposition. It states that total outlays (spending) shall not exceed total receipts (tax collections) in any fiscal year. If Congress wants to spend more than it takes in -- that is, to run a deficit -- it can only do so only with the approval of three-fifths of the members.

Critics claim the balanced budget amendment is unworkable. If a budget approved by lawmakers overestimates how much revenue the government would raise, they wonder, would Congress have to revisit the budget halfway through the year? And if a fiscal year ended with a tiny deficit -- say, one dollar -- would that trigger a constitutional crisis?

These concerns are overblown. Remember: The balanced budget amendment doesn't actually mandate a balanced budget. It simply requires a three-fifths vote of both the House and Senate to issue new debt. Lawmakers could use every budget gimmick, pull every smoke-and-mirror trick, and make the most ridiculous economic assumptions -- and it wouldn't matter. Once a new fiscal year began and spending threatened to outstrip revenue, they would have only two choices: cut spending or muster the votes necessary to run a deficit.

Of course, supporters of the balanced budget amendment make exaggerated claims too, for example that it will guarantee sound economic policy for all time. But all the amendment does is make it hard for politicians to finance their spending by borrowing money. It is entirely possible that a balanced budget requirement will simply lead politicians to finance their spending through higher taxes. This is why a supermajority requirement to raise taxes is so critical -- without it, the amendment would create a bias in favor of higher taxes.

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Some supporters also claim the balanced budget amendment would lead to dramatic reductions in interest rates. But most scholarly research shows these claims to be exaggerated. While it is almost certainly true that reductions in government borrowing will put downward pressure on interest rates, the impact appears too small to measure. Simply stated, in world capital markets where trillions of dollars exchange hands every day, changes in the deficit of $30 billion or so a year are not large enough to matter.

Far more important, at least as far as the economy is concerned, is the downward pressure the balanced budget amendment would put on spending. High levels of federal spending hinder the economy's performance by transferring resources from the productive sector of the economy to the government. A balanced budget amendment, by making it more difficult (though not impossible) to borrow, should slow the growth of government and leave a lot more money in the hands of those with an incentive to use it wisely.

Of course, for the biggest economic payoff, politicians also should include a provision requiring a supermajority to raise taxes. That way, politicians would have a hard time evading fiscal discipline by raising taxes to finance wasteful spending.

Properly written, a balanced budget will shrink a bloated government, meaning faster growth and more freedom. Americans should be suspicious of anyone who would object to that.

Daniel Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation, a Washington-based public policy research institute.