Balanced Budget Amendments Are Not Always What They Seem

By :: July 13th, 2011

A constitutional amendment that would require a balanced federal budget has again gained favor, especially among Republicans. The proponents should be forced to answer an important question, “What is a budget?” 

Forty nine states have constitutions or strong legislative language requiring budgets to balance.  An unfortunate effect has been to push many state activities “off-budget”. There are independent authorities that run turnpikes, hospitals, etc. and a plethora of other off-budget accounts whose main purpose is to avoid balanced budget requirements.  It has made the typical state budget very hard to read and understand.

Some efforts to limit the reach of balanced budget rules seem more legitimate. Often, for instance, only operating budgets must be balanced, and jurisdictions may borrow to finance capital investment.  However, politicians then have an incentive to define almost any activity as being a capital investment.  It was said that during the financial crisis facing New York City in the 1970s even janitors’ salaries became capital investments.  After all, they did have something to do with buildings.

A federal balanced budget amendment has the added disadvantage of making it difficult to run a countercyclical policy or finance wars and other emergencies unless there are escape clauses.  But every escape clause creates another loophole.  In order to avoid certain budget rules in the late 1990s, the Congress declared the 2000 census to be an emergency, even though we have known since 1789 that we would have to have one.

It is ironic that a balanced budget amendment is being discussed just as House Republicans passed a budget that would not be balanced until the 2030s.  The president’s fiscal commission’s recommendations did not balance the budget until 2035.  As hard as it will be, it may be easier to put a balanced budget requirement in the constitution than actually to balance a real budget.

9Comments

  1. Michael Bindner  ::  1:54 pm on July 13th, 2011:

    The desire for a balanced budget amendment is ultimately political. It derives from Republican self-knowledge that they will always be a majority party. A BBA gives them leverage in the legislative process by allowing them to stop action in the Senate when in the minority. If this were the center-right country they claimed it to be, a BBA would not be needed.

  2. Michael Bindner  ::  6:35 pm on July 13th, 2011:

    I meant minority party.

  3. SteveinCH  ::  7:54 pm on July 13th, 2011:

    Ah Michael, we can always count on you for partisan spin.

    More to the point, any Congress can create a new entitlement with ever escalating costs. It’s much harder to control spending regardless of who is in power. Statutory approaches don’t work.

    I’d rather have a BBA than the current debt to infinity or default approach and most BBAs allow emergency spending.

    Some restraint after all is better than none.

  4. Mathew Dill  ::  7:53 pm on July 14th, 2011:

    I have to start by saying I amp part of the Independent Party of Oregon. I lean slightly to the socially liberal side and a good bit the financially conservitive side.

    That being said some restriction to the spending limit needs to be made. The epic battles over the debt ceiling every so often are a threat to our stability. Though it will be resolved close to wire there is fallout before it gets to the point of a government shutdown. Be it in stalks or in the spending habbits of those who use SSI or other government aids that are threatened.

    Simply the government needs something to lower our spending before 2030-2035. If a BBA would do it then so be it. There will always be loopholes that will allow some to get around it. There will be issues that arise from it. these are things congress will have to improve in the future as well. Though hopefully most of this will be thought out on the first run.

    If we don’t for a balance budget how about jst the spending cap at 75% of the money spent has to come from taxes and no more then 25% from borrowing. This is a step in the right direction atleast.

    I have to agree with SteveinCH that you are preaching a one sided argument. It would be best if you were willing to see both sides, not to mention the middle ground where many Americans fall.

  5. Michael Bindner  ::  9:28 pm on July 14th, 2011:

    A BBA is purely partisan. The only kind that is not is one where no appeal is possible at all and where actions like higher tax rates or sequestration are the consequence. I am all for regional balanced budget requirements, with regions funded by VAT and Net Business Receipts Taxes (essentially a hidden VAT with deductions). The VAT would fund discretionary spending in the region (military and civil) while the NBRT would fund non-pension retirements. If discretionary were high or VAT low in any region, there would be automatic rate increases and sequestrations – with the opposite in the event of a surplus. If NBRT did not cover entitlement obligations, rates would go up and benefits might be scaled back – although in case of economic downturn, an expanded child tax credit might actually be increased to provide stimulus – even with a higher rate or temporary deficit (with the consent of the national caucus). Setting up regional and national caucuses could be done by rules changes – however region specific excises and enforceable balance requirements would require an amendment – but not the one proposed by the GOP.

  6. Michael Bindner  ::  9:31 pm on July 14th, 2011:

    Higher taxes or lower benefits for the middle class will slow things down – however whenever tax hikes for the rich have occurred, both post-WWII and under Clinton – the economy actually did better. This will pretty much happen automatically – provided we keep Larry Summers away from Obama.

    I am also in the Indy Party, by the way, in the VA Indy Green branch.

  7. SteveinCH  ::  12:23 pm on July 15th, 2011:

    The BBA proposed is highly partisan. A BBA in general is not.

  8. SteveinCH  ::  12:24 pm on July 15th, 2011:

    I seem to remember something about correlation and causality….

    I like that you consider the Green party independent. Kind of like calling the CBPP nonpartisan.

  9. Tom Coburn: Tax Subsidies Are Socialism | Financial Publicity  ::  2:41 pm on July 19th, 2011:

    […] is that Coburn has a list. Unlike those lawmakers who vote for a balanced budget Constitutional amendment that can neither pass nor succeed, or those lawmakers who support deep, but unspecified, […]