De-Simplifying the Balanced Budget Amendment
Sounds great, right? A balanced budget amendment. It’s a slam-dunk. Surely we can all agree that we should have a balanced budget (except under rare and specific circumstances), and that this is an important and necessary step towards fiscal solvency. It almost seems too obvious. Why on earth didn’t we do this decades ago?
Well…maybe it’s not quite so simple.
Here’s my take on it: some form of a balanced budget amendment is necessary. As it stands now, we’ve grown so accustomed to running an increasingly massive budget deficit on an annual basis, that the de facto presumption is that we’ll continue to do so. And any time we balance the budget, it’s considered a big deal. A balanced budget amendment would reverse that. We shouldn’t be elated when the budget is balanced; we should expect that. Rather, we should be skeptical and cautious when it’s not balanced.
Therefore, a constitutional mandate to balance the budget is necessary. The problem doesn’t lie in the underlying goal or intent, but in the specific approach sought by the Congressional Republicans. The biggest issue I have with their approach is the idea of capping spending as a percentage of GDP (currently, they seek a cap of 18%), allowing for exceptions in a state of declared war or when 2/3 of both the House and Senate agree to allow more spending. I first read about this in a great New York Times blog post by a former IMF chief economist. You can read it for yourself, but I would like to draw attention to a few of his points about how this 18% cap could really hamper the progress of the US economy in the years to come.
The first thing he points out might seem like a trivial concern, but it’s really a big one when you put it in perspective. GDP does not have a “legal” definition. (Under the assumption that knowledge of economy theory ranges widely among my readership, I’ll very simply define GDP here: It’s a measure of the size of the American economy, and therefore a measure of economic activity. The raw number is equal to the amount of total income by all Americans in a given year). Although the federal government does have a formula that they prefer to use when calculating GDP, and although they do use this same formula every year in issuing official reports on economic data, nowhere is it written into stone that this definition has to be used.
Why is this an issue? Consider an example: some president at some point in the future wants to spend loads of money, above the 18% cap. He can simply redefine GDP so that it’s calculated in such a way that the number is suddenly larger than it would have been had the traditional formula been followed (he could, for example, sign a law requiring that small jobs involving cash payments such as babysitting, lawn mowing and table waiting, be reported to the IRS so that the value of those payments can be added to GDP). All of a sudden, GDP goes up on paper (but the economy is the same size) and that particular administration is enabled to spend more. Sets a nasty precedent, doesn’t it?
The specific figure of 18% that they’ve chosen raises some questions as well. While that figure might make sense right now, with a growing percentage of the population becoming eligible for certain entitlements as the baby boomer generation retires en masse, we will need to devote a larger percentage of GDP to entitlement spending than ever before (it should go without saying that I support massive reform of our entitlement programs to promote the future solvency of these programs in the wake of the massive expense that this new generation of retirees represents). The 18% figure is based on historical trends, not on future projections. Yet the fiscal circumstances of the next few years are unlike anything we’ve ever experienced, and need to be addressed as such. The 18% figure needs to be more flexible to accommodate the kind of circumstances that we haven’t before seen, and that weren’t necessarily considered in developing that figure.
Finally, I’d like to use a hypothetical scenario to illustrate one final danger of setting a government spending cap as a percentage of GDP. Suppose we have a situation of stagflation — defined as a stagnant, or shrinking, GDP combined with high inflation (this happens rarely, but when it does, it can be fatal to a nation’s economy — just look at pre-WWII Germany). In that particular scenario, GDP (by definition) goes down, and therefore the spending cap decreases. In addition, high inflation means that the real value of government expenditures decreases, leading to a massive net decrease in government spending, when the economy is already desperately hurting. I’m no Keynesian, but it doesn’t take a far-left economist to acknowledge that such a situation would spell serious trouble for the economy. And while the rule could be temporarily suspended by a 2/3 vote in both houses of Congress, one lesson that should be drawn from the recent debt ceiling debate is that you can never completely trust Congress to put aside ideology for the greater good of the economy.
The point of this is not to dismiss the idea of a balanced budget amendment — as I said, I would absolutely support that kind of measure, if it contains the kind of provisions necessary to give Congress flexibility in times of armed conflict, and unusual or unique (but far from impossible) economic circumstances. I just hope that before crying out for the need to balance the budget, political activists take the time to do the research and understand all possible consequences of a balanced budget amendment — both the good and the potentially scary.
