The Case for a Balanced-Budget Amendment

by Douglas Holtz-Eakin

The House is voting tomorrow on a balanced budget amendment (BBA) to the U.S. constitution. The conventional wisdom — espoused in graduate programs in economics across the nation — is that a BBA is the budgetary policy equivalent of returning modern medicine to the practice of bloodletting. This is badly mistaken. It is time for the U.S. to adopt a BBA.

Why? At present, the federal government does not have a fiscal policy. Instead, it has fiscal “outcomes.” The House and Senate do not reliably agree on a budget resolution. Annual appropriations reflect the contemporaneous politics of conference-committee compromise, and White House negotiation. Often, the annual appropriations process is in whole or part replaced with a continuing resolution. Annual discretionary spending is not coordinated in any way with the outlays from mandatory spending programs operating on autopilot. And nothing annually constrains overall spending to have any relationship to the fees and tax receipts flowing into the U.S. Treasury. The fiscal outcome is whatever it turns out to be (usually bad), and certainly not a policy choice.

I believe that it would be tremendously valuable for the federal government to adopt a fiscal rule. Such a rule could take the form of an overall cap on federal spending (perhaps as a share of GDP, a limit on the ratio of federal debt in the hands of the public relative to GDP, a balanced-budget requirement, or something else. Committing to a fiscal rule would force the current disjointed appropriations, mandatory-spending, and tax decisions to fit coherently within the adopted fiscal rule. Accordingly, it would force lawmakers to make tough tradeoffs, especially across categories of spending.

Most importantly, it would give Congress a way to say no. Sending proposals would not simply have to be good ideas. They would have to be good enough to merit cutting other spending programs or using taxes to dragoon resources from the private sector. Congress would more easily be able to say, “Not good enough, sorry.”

What should one look for in picking a fiscal rule? First, it should work; that is, it should help solve the problem of a threatening debt. A fiscal rule like PAYGO at best stops further deterioration of the fiscal outlook and does not help to solve the problem. Second, it is important that there be a direct link between policymaker actions and the fiscal-rule outcome.

Finally, the fiscal rule should be transparent so that the public and policymakers alike have a clear understanding of how it works. This is a strike against a rule like the ratio of debt-to-GDP. The public has only the weakest grip on the concept of federal debt in the hands of the public, certainly does not understand how GDP is produced and measured, and (God help us) may not be able to divide. Without transparency and understanding, public support for the fiscal rule will be too weak for it to survive. No matter which rule is adopted, it will rise or fall based on political will to use it and the public’s support for its consequences.

In this setting, what should one think of a BBA? First, fiscal constraints in the form of spending caps, triggers, and other like devices are laudable, but fall short of constitutional amendment in their efficacy. A constitutional amendment, by design, is (effectively) permanent and therefore persistent, even if bypassed in certain exigent circumstances, in its effect on U.S. fiscal policy. Fiscal rules should allow policy figures to say no. A constitutional amendment will not only allow that, but given the gravity inherent in a constitutional amendment, hopefully dissuade contemplation of legislative end-arounds that other rules might invite.

Second, there is a clear link between congressional actions — cutting spending, raising taxes — and adherence to a balanced-budget amendment. Of course, congressional action is not all that determines annual expenditures and receipts. Military conflicts and other such contingencies can incur costs without advance congressional action, while economic conditions can affect tax revenues and some kinds of spending, such as unemployment insurance and other assistance programs.

However, these fluctuations are ultimately not the driving force between the U.S. fiscal imbalance. Indeed, in a world with stable tax revenue and without frequent military contingencies, the U.S. would still be headed towards fiscal crisis. Rather, enacted spending and tax policy largely determine the U.S. fiscal path that must be altered to avert a fiscal crisis. A meaningful constraint on these factors would confront policymakers with the necessity to alter those polices, and as discussed above, to make the choices and tradeoffs needed to shore up the nation’s finances. Tying those choices to an immutable standard, in the form of a constitutional amendment would facilitate that process.

The ability to conduct counter-cyclical fiscal policy is the strongest objection by most who oppose a BBA. But notice a couple of things.#more# First, repeated discretionary fiscal policy has been unsuccessful in the 1960s and 1970s in the U.S. (when it was the policy norm) and again in the 2000–2011 era. Indeed, the only place these policies are successful are on the blackboards of America’s classrooms and in the macroeconomic models based on Keynesian principles (where they literally cannot fail). So the constraint is not a policy cost; it is a policy benefit.

A third facet of a constitutional amendment that augurs well for its efficacy is the ratification process itself. This is a process that takes years. While the two-century long ratification of the 27th Amendment may be an extreme example, suffice it to say successful ratification of a constitutional amendment requires acceptance at many levels of public engagement. For the purpose of constraining federal finances, this is beneficial, as it necessarily requires public “buy-in.” Without question, the changes needed to address federal spending policy will be difficult. Any process that engages the public, and by necessity, requires public complicity to be successful will ease the process of enacting otherwise difficult fiscal changes.

Lastly, the very nature of a constitutional amendment shields it from the annual vicissitudes of federal policymaking. It cannot be revised, modified, or otherwise ignored in the fashion of the many checks on fiscal policy enacted or attributable to the Congressional Budget Act of 1974 or its successors. Congress cannot renege on its obligations with such an amendment in place.

But not all balanced-budget amendments are created equal. Balanced-budget amendments can differ significantly, with considerable variation in the consequences of their design.

While largely the result of choices by policymakers, the U.S. fiscal situation is shaped in some way by forces outside of the legislative process, such as war, calamity, or economic distress. Critical to an effective balanced-budget amendment is the acknowledgment of this reality with a mechanism for adjusting to these forces without undermining the goal of the amendment to constrain fiscal policy. The abuse of emergency designations in legislation to get around budget enforcement is an example of what can happen when the goal of constraining fiscal policy is subordinated to flexibility in the face of some crisis, real or otherwise. Stringent accountability, such as requirement of a supermajority, can mitigate this problem.

Past iterations of balanced-budget amendments have faced legitimate questions as to their capacity to limit the scale of the federal government. A balanced-budget amendment assumes that at some point, the tax burden necessary to balance the expenditure of a large federal government reaches an intolerable level. But there is nothing about a balanced-budget amendment alone that precludes reaching tax and spending levels just approaching that tipping point, which is far from desirable policy.

Accordingly, recent examples of balanced-budget amendments have sought to stanch the accumulation of debt (which is ensured by balance) while also limiting spending to the historical norm. Likewise, recent examples of balanced-budget amendments — including the one just passed out of the House committee — limit Congress’s ability to raise taxes. In each case, these limitations can be waived by supermajority votes. These are sound approaches that address concerns that a requirement to be in balance will add tax policy to the share of fiscal policy already on autopilot.

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