How do you kill the economy? Pass a balanced budget amendment.
Guest post by Publius
The House recently passed “Cut, Cap and Balance” (see John McCain’s fantastic take on it here).
Republicans are convinced of the need for a balanced budget
amendment, and one of the most cited arguments for they give for a
balanced budget amendment is that 49 states have one so the federal
government should too.
The concept of a balanced budget amendment sounds intuitive enough.
“Ordinary Americans and 49 states have to balance their budgets,” the
argument goes, “so Congress should too.” Well, not exactly.
First, there is a huge difference between the balanced budget
“amendments” (several states have laws instead of constitutional
amendments) at the state level and the proposed amendment at the federal
level. The state amendments, for example, do not even attempt to
balance the entire state budget. Instead, they almost exclusively only
apply to a state’s “general fund.” The general fund oftentimes
constitutes less than half of a state’s budget. It is the fund out of
which general expenditures flow and into which general revenues enter.
“Special” expenditures and revenues, such as gasoline taxes, education
expenses, etc., have nothing to do with the general fund and are exempt
from the balancing requirement.
If Congresspeople would stop and think about their argument for a
moment, they would quickly realize that the balanced budget requirements
at the state level either can’t apply to the entire budget or are laxly
enforced. Most every single state is currently running a deficit, and
has been for several years! Further analysis by these Congresspeople
would also show the issue isn’t lax enforcement- at least exclusively.
In 1987, the Advisory Commission on Intergovernmental Relations published an oft-cited study
(PDF) of state balanced budget requirements. The study examined each
state’s budget balancing requirements and the mechanisms each used to
enforce the requirements. It then ranked each state on a scale of 0-10,
with 0 being no enforcement mechanism and 10 being the strongest
possible enforcement mechanism. 26 of the states ranked a “10,” and in
2004, California recently became the 27th state to join that category by
adopting an amendment to its constitution. Here’s how those states
have done with their deficits since FY 2009:
States in categories 3-5 (fairly lax enforcement) had the largest
deficits by far over the measured periods, but states in category 10
(most stringent) were the next worst deficit spenders. Ironically,
states with little to no enforcement mechanism had almost no deficit
(though only 2 states fit in this category, so not much of a sample
size). This suggests that stringent enforcement of a balanced budget
amendment is insufficient to produce a balanced budget for the states.
The scatterplot table below (amounts in thousands) shows the deficits
by year, state and category. California’s enormous deficits and NY’s
2010 deficit were removed from the scatterplot because they shrunk the
scale of the chart so much the rest was not legible:
The scatterplot is a bit messy, but it shows the size of the deficit
for each state within the 0-10 enforcement categories described above.
There’s no getting around it. No matter how strict a state balanced
budget requirement is, states continue running deficits during this
economic downturn. This doesn’t mean the balanced budget requirements
have no impact- only that they don’t accomplish what Republicans in
Congress think they accomplish.
One might ask, “Why isn’t the federal proposal (which demands that
the entire budget be balanced) more workable than the state proposals?”
Well, first consider that the federal “general fund” only accounts for
about about 35% of the entire federal budget.
That number includes defense spending, however (which is considered
“discretionary” even though it has a history of only going up).
Non-defense discretionary spending only accounts for about 15% of the
budget.
A true “balanced budget amendment” like what Republicans have
proposed could require that money which is allocated to defense spending
or other mandatory spending (social security, Medicare, Medicaid,
interest on the debt, etc.) be cut in order to balance the budget. In
FY 2010, for example, the deficit was about $1.3 trillion. Total
non-defense discretionary spending in FY 2010 was only $714 billion.
Even if all non-defense discretionary spending was eliminated in FY
2010 (no spending on education, justice, health, roads or other
infrastructure, etc.), we would have still had a $586 billion deficit.
Total defense spending in FY 2010 was only $663.7 billion, meaning to
avoid any cuts to mandatory spending (which, as its name implies, is
money we must spend), the Department of Defense budget would have been
reduced by 88% (to a total of $77 billion). The last time defense
spending was that low was 1973.
As should be obvious, when a severe recession hits, it’s quite
difficult to balance a budget. In fact, it’s also precisely the wrong
thing to do in a recession (when spending should go up as a stabilizer).
The federal government has a macroeconomic role through fiscal policy
which it cannot play if it is hamstrung by a balanced budget amendment.
But even assuming that wasn’t the case, there’s just not enough
discretionary spending to cut to balance a budget in a severe recession.
Recessions reduce tax revenue dramatically because people lose jobs
and stop paying FICA and income taxes. There just aren’t enough
discretionary dollars to eliminate to keep pace. That means defense
spending and/or mandatory spending has to be cut. So who should cut it?
This is the next problem with the balanced budget amendment. The
enforcement mechanism. If the Constitution requires Congress to balance
a budget and it doesn’t- what happens? In some states, the governor
can eliminate spending without legislative approval (like a line-item
veto). In 2010, however, there is no chance any politician would have
voluntarily eliminated 100% of discretionary spending plus a large
amount of defense/mandatory spending. The courts, then, would be required to mandate the cuts
or, alternatively, raise taxes (also a bad idea during a recession).
One can only imagine the Republican cries of “activist judiciary” in
such an instance- and ironically they would have been the ones demanding
that the judiciary take such an activist role. I should mention that
tax increases could be adopted in lieu of spending cuts, but I haven’t
spent much time on that option because: a) Republicans would never agree
to tax increases; and b) to ensure no tax increases are passed,
Republicans have proposed in Cut, Cap and Balance that all tax increases
require a 2/3 vote, effectively making them illegal.
So, what happens if the courts also don’t act to force the budget to
balance? The Constitution is violated and, as we are seeing with the
debt ceiling debate, the nation’s credit rating would beat risk as a
consequence (thereby threatening global economic instability).
Of course, the federal amendment could be fashioned to look more like
the state balanced budget requirements and only apply to discretionary
spending. Needless to say, such an amendment would not eliminate
federal deficits (which is the stated purpose of enacting such an
amendment). The amendment would be circumvented entirely in recessions
(appropriately so from an economic perspective) which would only serve
to undermine the Constitution and the rule of law. The accounting tricks employed by states
to “balance their budgets” would only be magnified at the federal level
thereby creating far more frustration with the system (California
technically has a balanced budget this year, despite its projected $17.9
billion deficit).
The balanced budget amendment as included in Cut, Cap and Balance is
quite possibly the worst economic idea any major party has actively
promoted in modern history. It can’t work- except to wreak havoc. Few
other proposals stand to do as much harm to the US and global economies,
particularly during recessions.
(Cross-posted at The Fourth Branch.)
Labels: balanced budget amendment, debt ceiling, Republicans, U.S. budget, U.S. Constitution, U.S. economy
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