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.