A BALANCED BUDGET AMENDMENT: DOES IT MAKE SENSE?

Here’s issue #6 of my Policy and Politics Newsletter, written 11/20/11. As you probably know, the US House voted on and rejected a Balanced Budget Amendment to the US Constitution this week.

Consideration of a Balanced Budget Amendment (BBA) to the US Constitution by both houses of Congress was required as part of the agreement that raised the debt ceiling back in August. The House and Senate will probably vote on different versions of the BBA. (See below for more detail.) A BBA, if ratified, would constitute a dramatic, some say radical, shift in policy making.

The biggest concern about a BBA is that in a recession, when government revenue falls, the BBA would require cuts in expenditures. Therefore, government likely would have to cut safety net programs, such as unemployment compensation, food stamps, heating assistance, and subsidies for health care when they are most needed. It would eliminate the ability of the government to serve as a counter weight to recessions by spending when other sectors of the economy are on a downswing. Seven Nobel Prize-winning economists have stated that a BBA would “mandate perverse actions in a recession” and would harm economic growth. Norman Ornstein of the conservative American Enterprise Institute has called a BBA “about the most irresponsible action imaginable.” [1]

An argument advanced in support of a BBA is that states have and have managed to live with requirements for balanced budgets. However, because of this, during the current recession, state and local governments have been cutting jobs nationwide by roughly 10,000 a month and have been making painful cuts in services and programs. They have been helped through this crisis by federal government support and federal deficit spending, where they get roughly a third of their revenue, and especially by the stimulus funding in 2009 that explicitly supported states. Moreover, states can borrow for capital spending outside of their balanced budgets, something the federal BBA would prohibit.

Possible provisions of a BBA include: [2]

• Super majority votes in both houses of Congress are required for:
  • Deficit spending (most likely a three-fifths [60%] majority)
  • Tax increases (most likely a two-thirds [67%] majority)
• Cap on overall spending at 18% of gross domestic product (GDP, the size of the overall economy) (Note: Under President Reagan spending averaged 22% of GDP)
• Capital spending (i.e., long-term investments in infrastructure and human capital) would be included under the cap and spending controls (Note: Generally not the case at the state level)
• Exemptions for national emergencies and Social Security

In summary, the BBA makes for great politics for some but is lousy policy. Please note that President Reagan promoted and popularized the BBA while the budgets he presented to Congress were the eight most out of balance budgets since WWII. And that for many of those pushing the BBA today, it was not a priority for them when George W. Bush was president and significant surpluses inherited from President Clinton became large deficits.