More than a Balanced Budget Amendment

In their response to the State of the Union, Senators Marco Rubio and Rand Paul supported a Balanced Budget Amendment.  Senator Paul:

To begin with, we absolutely must pass a Balanced Budget Amendment to the Constitution!

The amendment must include strict tax and spending limitations.

And Senator Rubio:

The real cause of our debt is that our government has been spending 1 trillion dollars more than it takes in every year. That’s why we need a balanced budget amendment.

Rubio doesn’t specifically mention the spending limitation that Paul mentions, but in a separate press release he endorses S. J. Res. 7, a Balanced Budget Amendment (BBA) that has been authored by Senator John Cornyn. While the text of S. J. Res. 7 is not yet posted, I believe it is the same as S. J. Res. 10 that Orrin Hatch sponsored in 2011.  At any rate it is much more than a BBA. It combines a requirement for a balanced budget with an expenditure limit of 18% spending-to-GDP, not including spending used to pay off debt principal. (Interest payments, it would appear, count towards the 18%.) The Congress could waive the provisions with a 2/3rds vote in each body, and they would be automatically waived in the case of a declaration of war “against a nation-state.” In other defense emergencies, a three-fifths vote would be required. A 3/5ths vote of each body would also be required to increase the debt ceiling.  

Several economists have pointed out that the spending limit is problematic for both being too low and for using a faulty denominator. Alan Viard at AEI has a readable piece explaining the problem. The denominator uses GDP for 2011 to cap spending for FY 2012-13, which begins 9 months after the end of 2012 and ends 21 months afterward.  

I believe those of us who believe government spends too much and does too much are better served by referring to this not as a BBA but as an expenditure limitation amendment. If all you wanted was a BBA it is little more than a quibble whether the proper limit should be 18% versus 20% and whether the denominator is last year’s GDP or a forecast of this year’s. My colleagues in the economics profession can find the number, and I do not think supporters should get hung up on that. The goal is to “shackle the spenders“; the tightness of the shackles is secondary.

In supporting a BBA, Nobel laureate James Buchanan, in a 1994 speech to the National Tax Association, made a distinction between a rule that defines a procedure through which a governing body makes decisions and a rule that “acts directly on the outcomes that any such decisions might describe.” What may trouble some is that the expenditure limit is a rule that acts directly on outcomes. But I would disagree with that. 

First, the bad rap expenditure limits have gotten is largely based on the experience in Colorado, but in this case there was a marked decline in tax revenues that forced the government there to cut spending sharply. That would not likely be the case in the U.S. nationwide, where achieving 18% revenues to GDP (for the unified budget) has been the historical norm. It’s just that spending has been 20%. Given the size of our debt, capping at the lower number would make some sense, so that in flush years the government could pay down some our principal.

Second, Buchanan’s larger point was that it was time to end the disconnect between spending and revenue that happens only in government. The procedure you and I go through to balance a budget is a norm: we spend what we earn, eventually, over a lifetime. We borrow a little, often early in life when our incomes are less, and repay as our incomes grow with our experience and our skills. Buchanan argued that Keynes had unleashed something by saying it was okay to spend a little more when times were bad. We all want to do that.  We all want to eat more on Thanksgiving or drink more on New Year’s Eve. It’s the diet and abstinence in January that are hard.  

Government spending for a wide array of goods may be authorized, and every one of these goods may be valued positively by some or all constituents. The approval of these rates of spending may, however, proceed without explicit regard to the genuine opportunity cost that must ultimately be measured in the sacrifice by someone, sometime, of other values that might have been produced. 

Using a cap on expenditures would force the present generation, at the margin, to face the opportunity cost, while a Balanced Budget Amendment compels it not to shift that cost to a future generation. The Congress and the President need a procedure that leads to a balanced budget, and they need shackles to stop the spending bias inherent in our system. A process or procedural rule like that belongs in our Constitution.

  1. BrentB67

    BBA is a cop out. If we want a balanced budget we need an engaged electorate that does not want or believe in getting endless benefits paid for by someone else (the evil rich) and we hold our legislators accountable.

    It would be helpful also to reign in the Federal Reserve to keep them from monetizing trillions of debt per annum. If the U.S. was subject to market rates of interest given our basket case balance sheet I think we would find spending restraint very soon.

    Our budget problem starts in the mirror and ends in Washington DC.

  2. Steve C.

    Any amendment that passes, would have enough loopholes as to be ineffective.

  3. Craig Wallace
    Brian Clendinen: The text I read back in 2011 does not take into consideration a lovely little account trick called unfunded liabilities. You know the 240 trillion we have right now. Also I am just for a balanced budget. The limitations on spending I think are silly to have in the constitution because GDP is really not a good metric. It is just better than nothing which we had before for economic growth.

    Now an amendment forcing all tax rates to be the same regardless of location, product type, race, Income, Industry, occupation, marriage status, ect I would be for. Make everyone pay the same rate on any tax allow no deduction (except charitable which we have had sense before the founding).  I think that would do more to keep taxes down than anything else (also help reduce special interest) along with requiring full funding of all future liabilities. · 8 hours ago

    Edited 8 hours ago

    Is there a list of these ULs?

    Which are the largest/oldest? 

    Is the can kicking on these ULs only now starting to bite? 

  4. liberal jim

    I think BBA proposals are more or less BS proposed by politicians who love big government, but want to sound as if they do not.  The concept of talking about spending as a percent of GDP is at best misleading.  If the idea of it is examined this becomes clear.  If GDP tripled form 16T. – 48T. not one more dollar of defense spending would be required, less not more social service spending would be needed, and since this could only occur with less not more regulations the same holds true for the regulators.  Yet politicians insist government spending should increase from 3.4 to  over 10 T.  Looked at logically spending in real terms should decrease and in percentage terms shrink for 24% of GDP to less than 10%.

    Clearly the problem here is politicians, including Republicans like Ryan, Rubio,  etal, who think more government is a good thing  and are searching for ways to justify it.

  5. Brian Clendinen

    The text I read back in 2011 does not take into consideration a lovely little account trick called unfunded liabilities. You know the 240 trillion we have right now. Also I am just for a balanced budget. The limitations on spending I think are silly to have in the constitution because GDP is really not a good metric. It is just better than nothing which we had before for economic growth.

    Now an amendment forcing all tax rates to be the same regardless of location, product type, race, Income, Industry, occupation, marriage status, ect I would be for. Make everyone pay the same rate on any tax allow no deduction (except charitable which we have had sense before the founding).  I think that would do more to keep taxes down than anything else (also help reduce special interest) along with requiring full funding of all future liabilities.

  6. FloppyDisk90

    “Looked at logically spending in real terms should decrease and in percentage terms shrink for 24% of GDP to less than 10%.”

    This assumes there’s some knowable, definable upper limit on gov’t spending.  There isn’t.  It’s an economic good just like any other.  And the first principle of economics is that wants/needs for economic goods are infinite.  Think about food.  One can hypothesize a daily caloric and nutrient requirement based on age, physical activity, genetics, etc…  Yet we all spend more on food, both as an absolute amount and often times as a percentage of income, when income rises.  Why?  Because we all prefer steak to bologna.

    This same principle applies to gov’t spending on goods and services.  If GDP tripled it would indeed make sense to spend more on defense.  Defense “requirements” are based on the acceptance of a certain amount of risk.  Risk which is measured in terms of lives lost.  So if GDP were to triple we could afford to issue our troops laser rifles instead of BB guns.

    Finally, tying the budget to GDP gives our lawmakers an incentive to increase the size of the pie they’re slicing from.

  7. ThePullmanns

    To those who think that 18 percent is too low a figure: until the 19th amendment passed, government receipts and expenditures were about 3-5% of GDP unless there was a war on. We managed to get by fine on that for over a century. Maybe we should limit the spending to 10% instead of 18%.

  8. BrentB67
    ThePullmanns: To those who think that 18 percent is too low a figure: until the 19th amendment passed, government receipts and expenditures were about 3-5% of GDP unless there was a war on. We managed to get by fine on that for over a century. Maybe we should limit the spending to 10% instead of 18%. · 15 hours ago

    Yes! Now we are having a discussion.

  9. King Banaian
    C

    See this on the size and source of unfunded liability.  If it’s behind the WSJ paywall try this instead.  For the really wonky stuff, go here.

  10. Paul DeRocco

    I’m opposed to the BBA for one inescapable reason: it’s unenforceable. The Constitution can’t force the government to pass a balanced budget, because it can’t even force the government to pass any budget.

  11. Brian Clendinen
     

    Paul DeRocco: I’m opposed to the BBA for one inescapable reason: it’s unenforceable. The Constitution can’t forcee government to pass a balanced budget, because it can’t even force the government to pass any budget. · February 21, 2013 at 6:31pm

    Then add a lovely little poison pill,  that if congress does not have a balanced budget or meet the override requirements (and maybe add, does not pass a budget which is constitutionally required.) then all citizen or corporations would not legally be required to pay any tax, nor would any debt issued by the federal government during that time period be consider legal debt and therefor not enforceable in any court of law. Also the government could not go back and collect back taxes during this constitutional violation.  Granted congress could always pass a law that doubled taxes temporally but that would have a lot of issues.

     On the time of war clause, I would only put a small time limit on it say 6 months. How long would it really take for congress to meet to pass the over rider to pay for war spending.

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