Balanced budget amendment: Here's why it's a bad idea

Amending the Constitution won't move us toward a balanced budget anytime soon, and it will rob us of needed flexibility in hard times

July 21, 2011|By Philip Joyce

The U.S. government teeters on the brink of an unprecedented, self-inflicted debt default, and the House of Representatives can't seem to keep its eye on the ball.

After the House debated the fate of incandescent lightbulbs last week, it approved on Tuesday a bill called, "The Cut, Cap, and Balance Act of 2011." Among other things, it would tie an increase in the debt limit to approval, by both houses, of a constitutional amendment requiring a balanced federal budget.

It is imperative that the federal government reduces unsustainable budget deficits. While this whole bill is a symbolic gesture, since it cannot pass the Senate and the president has promised to veto it, a constitutional amendment is a particular distraction — a hidden-ball trick. It is the wrong thing, at the wrong time, for two reasons.

First, amending the Constitution is not necessary to balance the budget — and won't actually move us any distance toward that goal in the short run. Second, there is a real risk that this feel-good action will undermine market confidence in Congress' ability to do its job, while justifying public cynicism about Washington — thus making it harder for future legislators to work us out of the fiscal corner we're in.

The balanced budget constitutional amendment merely establishes a goal that future political leadership would have to reach. There are no penalties for failing to do so. In other words, between now and the day the amendment took effect, Congress and the executive branch would have to figure out what spending to cut and/or what revenues to raise in order to reduce the deficit to zero — and what sanctions to impose for failing to do so. The inability to agree on these policy changes, and sanctions, is the problem we already have today. There is nothing about the balanced budget amendment that helps us solve that problem.

Further, Constitutional amendments are not quick fixes. Both houses have to pass the amendment by a two-thirds majority. Then, three-fourths of the state legislatures must ratify the amendment within some specified time period, usually seven years. Then more delays — the House version of the amendment would take effect the second fiscal year following ratification, the Senate's after five years. Assuming state legislatures take the full seven years, this means that the House version would take effect in 2020, and the Senate version in 2023. How's that for responding to an immediate crisis?

Don't worry, though, states are unlikely to actually ratify the amendment, since it is not in their interest for the federal government to balance its budget on an annual basis. Currently, states get almost one-third of their money from the federal government.

Besides being unlikely to help much, the amendments on the table rely on a faulty premise and faulty economics. Sen. Orrin Hatch, the main Senate sponsor of the amendment, argued that the federal government should balance its budget because "hard-working families across the country have tightened their belts, balanced their budgets, and lived within their means." He also pointed out that states are required to balance their budgets.

This would be a compelling argument, if only it were true. Families have mortgages, car payments, and student loans. State and local governments balance their operating budgets, but they borrow to build highways, dormitories or prisons. Equally, businesses carry debt.

Borrowing is a fundamental part of the financial model for families, corporations and governments. Used correctly, it can be very productive and result in measurable gains. The problem is not that the U.S. government has debt, it is rather that the fiscal imbalance is too large and too heavily weighted toward debt that does not make us better off in the long-run.

The only way to address the problem is to take timely action to reduce the debt. But not to zero, and not by imposing an arbitrary rule that says that revenues should match spending in every year. If we had a balanced budget requirement in place during the recent recession, it would have required spending cuts and tax increases — just when the economy was in its most fragile state. Federal stimulus efforts during the most recent recession were a lifeline for state and local governments. A balanced federal budget would have left states on their own.

The language of amendments being considered this year would create a particularly difficult situation as they require spending be limited to 18 percent of gross domestic product. Leaving aside the rather bizarre notion that we would put a specific economic measure like this in our most sacred founding document, it would require huge cuts in Social Security and Medicare (larger than those in Congressman Paul Ryan's plan) to achieve this goal.

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