Greenstein on a Balanced Budget Amendment

Testifying before the House Judiciary Committee last Friday, Center President Robert Greenstein explained why a constitutional balanced budget amendment would be unwise.  Here are some excerpts:

The goal of a constitutional balanced budget amendment is to address our long-term fiscal imbalance.  Unfortunately, a constitutional balanced budget amendment would be a highly ill-advised way to try to do that and likely would cause serious economic damage.  It would require a balanced budget every year regardless of the state of the economy, unless a supermajority of both houses overrode that requirement.  This is an unwise stricture that many mainstream economists have long counseled against, because it would require the largest budget cuts or tax increases precisely when the economy is weakest.  It holds substantial risk of tipping faltering economies into recessions and making recessions longer and deeper.  The additional job losses would likely be very large.

When the economy weakens, revenue growth drops and revenues may even contract.  And as unemployment rises, expenditures for programs like unemployment insurance — and to a lesser degree, food stamps and Medicaid — increase.  These revenue declines and expenditure increases are temporary; they largely disappear as the economy recovers.  But they are critical for helping struggling economies to keep from falling into a recession and for moderating the depth and length of recessions that do occur.

When the economy weakens, consumers and businesses spend less, which in turn causes further job loss.  The drop in tax collections and increases in unemployment and other benefits that occur automatically when the economy weakens cushions the blow, by keeping purchases of goods and services from falling more.  That is why economists use the term “automatic stabilizers” to describe the automatic declines in revenues and automatic increases in UI and other benefits that occur when the economy turns down; these actions help to stabilize the economy.

A constitutional balanced budget amendment, however, effectively suspends the automatic stabilizers.  It requires that federal expenditures be cut or taxes increased to offset the effects of the automatic stabilizers and prevent a deficit from occurring — the opposite course from what sound economic policy calls for. . . .

Proponents of a constitutional amendment likely will respond . . . by noting that the proposed constitutional amendment would allow the balanced-budget requirement to be waived by a vote of three-fifths of the House and the Senate.  That, however, does not address this problem.  It is difficult to secure three-fifths votes for anything; consider the paralysis that marks the work of the Senate.  Moreover, it may take months after a downturn begins before sufficient data are available to convince three-fifths of the members of both houses of Congress that a recession is underway.

Furthermore, it is all too likely that even after the evidence for a downturn is clear, a minority in the House or Senate would hold a wavier vote hostage to demands for concessions on other matters (such as new, permanent tax cuts).  By the time a recession were recognized to be underway and three-fifths votes were secured in both chambers, if such support could be obtained at all, extensive economic damage could have been done and hundreds of thousands or millions of additional jobs unnecessarily lost. . . .

Nor is a recession the only concern.  Consider the savings and loan crisis of the 1980s, or the financial meltdown of the fall of 2008.  A constitutional balanced budget amendment would have hindered swift federal action to rescue the savings and loan industry or to rapidly put the Troubled Assets Relief Program in place.  In both cases, history indicates that federal action helped save the economy from what otherwise likely would have been far more dire problems. . . .

These are illustrations of why fiscal policy should not be written into the Constitution.

A parallel problem is that the proposed constitutional amendment would make it even harder than it already is to raise the debt limit, by requiring a three-fifths vote of both the House and Senate to raise the limit.  This is playing with fire.  It would heighten the risk of a federal government default.  A default would raise our interest costs and could damage the U.S. economy for years to come.

Proponents of a constitutional amendment sometimes argue that states and families must balance their budgets every year and the federal government should do so, too.  But statements that the constitutional amendment would align federal budgeting practices with those of states and families are not accurate.

While states must balance their operating budgets, they can borrow to finance their capital budgets — to finance roads, schools, and other projects.  Most states do so.  States also can build reserves during good times and draw on them in bad times without counting the drawdown from reserves as new spending that unbalances a budget.

Families follow similar practices.  They borrow — they take out mortgages to buy a home or student loans to send a child to college.  They also draw down savings when times are tight, with the result that their expenditures in those periods exceed their current incomes.

But the proposed constitutional amendment would bar such practices at the federal level.  The total federal budget — including capital investments — would have to be balanced every year, with no borrowing allowed for infrastructure or other investments that can boost future economic growth.  And if the federal government ran a surplus one year, it could not draw it down the next year to help balance the budget. . . .

Policymakers need to begin to change our fiscal trajectory.  As various recent commissions have indicated, we need to stabilize the debt as a share of GDP in the coming decade, and to keep it stable after that (allowing for some fluctuation over the business cycle).  But establishing a balanced budget amendment in the Constitution would be most unwise.  It would likely exact a heavy toll on the economy and on American businesses and workers in the years and decades ahead.  It is not the course the nation should follow.

You can read the full testimony here.