If Everyone Agrees We Should Balance the Budget by 2002, Whats the Problem with a Constitutional Amendment?
By Robert Greenstein
Some proponents of the balanced budget constitutional amendment now ask: "If leaders of both parties agree we should balance the budget by 2002, why not guarantee this goal be reached by having the Constitution require it?" There are many reasons why such a constitutional amendment is unwise.
Heightening Risks of Recession
It is one thing to seek a balanced budget in 2002. It is quite another matter to place an amendment in the Constitution that requires a balanced budget every year including years of anemic growth or recession unless and until three-fifths of both houses of Congress waive this requirement. Three-fifths majorities are likely to be difficult to amass until recessions have already started and some damage from overly austere fiscal polices has already occurred.
Furthermore, the proposed constitutional amendment would require the deepest program cuts or largest tax increases precisely when the economy is weakest and can least absorb them. The amendment requires that the budget be balanced every year regardless of the state of the economy. When economic growth is sluggish, revenues grow more slowly while costs for programs like unemployment insurance increase. As a result, the deficit widens. Under a balanced budget amendment, with a requirement for budget balance every year, greater deficit reduction would be required in periods of slow growth than in times of rapid growth. In fact, if a budget that was balanced at the start of a year slipped out of balance during the year because the economy was slowing down, budget cuts or tax increases would be required in the middle of the year to restore balance for the fiscal year as a whole.
This is precisely the opposite of what should be done to stabilize the economy and avert recessions. One of the key reasons we have had no depression and few severe recessions during the past 60 years is that what economists call the "automatic stabilizers" reductions in tax collections and increases in unemployment insurance benefits and means-tested entitlement benefits automatically kick in when the economy weakens and unemployment climbs. This helps to brake the economys slide. The balanced budget amendment would not only undermine the automatic stabilizing function the federal government plays but would push in the opposite direction by requiring greater retrenchment when the economy falters. As a consequence, the constitutional amendment is likely to make recessions more frequent and deeper.
Increasing the Risks of Default
The amendment also would increase the risk of a government default. It has often proved difficult to amass a simple majority in Congress to raise the debt limit so an impending default could be averted. Nevertheless, the amendment requires a three-fifths majority of both houses to raise the debt limit in the future. The amendment also envisions that the debt limit would be set at levels that allow no borrowing, thereby enabling the debt limit to be used to enforce the constitutional prohibition on deficits.
This aspect of the amendment would be likely to make default crises more frequent; when a budget that is balanced at the start of the year falls out of balance during the year due to slower-than-expected economic growth or other factors beyond policymakers control, default could threaten if cuts large enough to restore balance cant be passed swiftly and it proves impossible to secure a three-fifths vote to raise the debt limit. Exacerbating this problem, the amendment removes the principal tools the Treasury has used in the past to stave off default while Congress and the President worked out budget disputes; it bars use of the principal measures the Treasury used to avert a default during the budget crisis of late 1995 and early 1996.
For these reasons, the amendment not only would make default crises more frequent but would heighten the risk that at some point, a default actually would occur. CBO has warned that a default could have lasting consequences, even if it lasted for just a few days. By undermining the faith of government creditors and contractors that they would be paid in full and on time, even a temporary default could permanently raise the governments borrowing and contracting costs.
Moving Away From Majority Rule
The constitutional amendment also undermines majority rule, the basis for our democracy. The amendment would essentially enable minorities to engage in a form of extortion; they could threaten to plunge the nation into serious fiscal difficulty by refusing to help provide a three-fifths vote to waive the balanced budget requirement and raise the debt limit when a recession loomed, unless they were granted concessions on major policy issues as the price for their votes. For example, a minority could demand a permanent tax cut that grows in cost over time as its price for voting to permit a deficit and raise the debt limit during a recession. If that occurred, it would necessitate still-deeper budget cuts in subsequent years, most likely in programs for the middle class and the poor, to offset the revenue loss caused by the tax cut.
Inequitable Treatment of the Younger Generation
Charting a path to balance the budget in 2002 is helpful; it will make important progress in reducing the large deficits we otherwise will face after the baby boom generation begins to retire. But there is no reason to have a rigid constitutional mandate requiring a balanced budget in every year after the baby boom generation retires.
Such a requirement would be inequitable to those who are young today. If the cost of Social Security, Medicare, and all other government functions in the years the baby boom generation is retired must be covered in full by taxes raised in those same years, the burdens on those whose peak earnings years are between 2010 and 2040 will be too great. It makes more sense to allow moderate deficits during those years (and perhaps to aim for moderate surpluses in the years before the baby boomers retire) than to require balance every year.
Allowing moderate deficits during the baby boom generations retirement years would be consistent with how most families act. Families typically save for college and retirement costs. (They also borrow during college years.) They do not pay for all costs they incur during the college and retirement years out of those same years incomes. To bar the government from running moderate deficits when the baby boomers retire, even if the government has saved in advance for this eventuality, is inequitable to the generations who will be working in those years.
CBO Study Indicates a Balanced Budget Requirement Isnt Needed
A rigid prohibition barring modest deficits in those years also is unnecessary. A recent CBO study found that if deficits are held to two percent of the Gross Domestic Product through 2030, we will experience solid economic growth, and younger generations will be substantially better off than current generations. In fact, CBO found little difference in growth rates between such a policy and a policy of balancing the budget every year. It also is instructive that the goal Senator Bob Kerrey and former Senator Jack Danforth both deficit hawks set for the Entitlement Commission in 1994 was to limit the deficit to two percent of the Gross Domestic Product in 2030.
Recent history provides further evidence that a constitutional amendment isnt needed. For its first 200 years, the government ran either no deficits or modest deficits, except during wartime and recessions.(1) Deficits rose sharply only in the early 1980s, in part due to the large 1981 tax cut (which was supposed largely to pay for itself by igniting rapid growth but failed to do so). When policymakers of both parties saw the tax cut wasnt producing the desired results and deficits had risen to unacceptable levels, they acted. From 1986 to 1996, Congress and three administrations worked together to reduce the deficit by 70 percent, from 5.1 percent of the Gross Domestic Product in 1986 to 1.4 percent in 1996. In addition, it is likely an agreement will be reached this year to enact a deficit reduction plan that balances the budget by 2002.
Furthermore, Congress can add a strong enforcement mechanism to the package by extending the Budget Enforcement Act (BEA). First enacted in 1990 and extended in 1993, this Act features binding caps on discretionary appropriations and a binding requirement that entitlement and tax legislation either be deficit neutral or reduce the deficit further. Both the discretionary spending caps and the deficit-neutrality requirement for entitlement and tax bills are enforced by across-the-board cuts; these are triggered automatically if the caps or the deficit-neutrality stricture otherwise would be violated. The BEA has worked well; it has prevented the passage of legislation to spend any portion of the savings the 1990 and 1993 deficit reduction laws achieved. Moreover, when deficits came in below the forecast in 1996, the BEA prevented any of the extra savings from being spent. Extending the BEA, a step that should command broad support, would lock in the budget deal expected in 1997 and prevent Congressional backsliding in years after that. The Budget Enforcement Act has proven effective in countering any institutional bias that may exist toward deficit spending and has done so without rigid constitutional mandates that could injure the economy during recessions or be inappropriate in future eras.
Amendment Tilts the Playing Field, Making it Harder to Close Tax Loopholes than Cut Basic Programs
Still another problem is that the constitutional amendment is designed in a manner that would tilt the playing field. The amendment would make it harder to raise revenues and even to close special interest tax loopholes, including those that constitute "corporate welfare" than to cut programs. Under current law, legislation must be approved by a majority of those present and voting on a roll call vote or an unrecorded voice vote. The constitutional amendment would change this, requiring that any legislation that included a revenue-raising measure to be approved on a roll call vote by a majority of the full membership of both houses, rather than a majority of those present and voting. Thus, a measure including revenues that passed the Senate 49-47 or even 51-50, with the Vice President breaking the tie, would be rejected. Had such a provision been in effect in 1993, the Clinton budget plan enacted that year would have been defeated in the Senate.
While measures to close tax loopholes would require a majority of the full membership of both houses, cuts in programs including Social Security, Medicare, veterans programs, education, environmental programs, and assistance for poor children would continue to require a majority of those present and voting and could still be approved on unrecorded voice votes. Since the majority of the government benefits that the middle class and the poor receive come from programs, while the bulk of the government benefits the affluent and large corporations get come in the form of tax expenditures, a measure that makes it harder to raise revenues than cut programs is likely to favor the wealthy and powerful at the expense of the middle class and the poor.
Altering the Balance of Powers
The amendment also would alter the balance of powers that has served our nation for more than 200 years. Suppose a deficit emerged during a year and Congress could neither reach agreement on how to eliminate it nor secure a three-fifths majority to allow a deficit. What would happen? Would the courts take it upon themselves to design budget cuts or tax increases and order such measures to be implemented? Would the President unilaterally impound funds? The potential for major shifts in power in our system of government is large.
Risks to the Stability of the Banking System
Finally, the amendment poses a risk to the stability of the U.S. banking system. In the event of a potential banking crisis, the U.S. Government could be prevented from making deposit insurance payments if such payments would unbalance the budget, unless Congress has been able to muster a three-fifths majority to waive the balanced budget requirement or to make what could be very large cuts elsewhere in the budget on very short notice to offset the deposit insurance costs. If the government is unable to respond to a banking crisis, the guarantee that the full faith and credit of the U.S. Government stand behind the U.S. banking system will not have as much meaning; that, in turn, could have adverse consequences for financial markets. This is another reason why writing a balanced budget requirement into the Constitution something no other major national government does is unwise.
1. Until the early 1980s, any deficits in periods other than wars or recessions were sufficiently small that the national debt declined as a percentage of the Gross Domestic Product. For example, the nation ran small or modest deficits during most years of the 1960s and 1970s, and between 1960 and 1980, the debt declined as a percentage of GDP.
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