Politics and Governance

Three Reasons Why a Federal Balanced Budget Amendment Is Conceptually Flawed

With every economic slowdown in recent history, calls for a balanced budget amendment to the U.S. Constitution reach a fever pitch. Many times, this sort of “common-sense” governance is presented with hokey populist rhetoric equating the budget of an average American family with that of our federal government. This can—at least to a naïve observer—be made into a compelling case, as there are endless soundbite-worthy ways to illustrate just how much more our federal government spends than what it takes in.

You could scoff about the fact that the federal budget has only been balanced six times in the past 50 years. Throwing around dizzyingly large figures is also a popular strategy, such as the fact that the past budget alone added $1.3 trillion to the debt, bringing total U.S. debt to around $15 trillion. If you like your arguments for a balanced budget mixed with a touch of jingoism, perhaps you could fret about China holding about $1.1 trillion in U.S. debt (despite the fact that the Federal Reserve and other intra-governmental holdings dwarf that amount by about 6 times over).

To be clear, we should be engaged in a sustained, determined effort to reduce U.S. debt. However, this can—and has—been done perfectly well under the current Constitution. Gimmicky strategies like balanced budget amendments may sound good on the campaign trail, but they are fundamentally flawed methods for managing federal debt levels for three main reasons.  They:

Mistakenly prioritize the reduction of the debt level over the reduction of the debt burden.
At the heart of the arguments for an amendment is the idea that balanced budgets are inherently good because they do not add to the deficit—i.e., the overall debt level. While a deficit does increase the debt level, it doesn’t necessarily increase the debt burden, or the borrower’s ability to service the debt. This ability is, of course, directly related to the borrower’s wealth.The federal government’s wealth is a function of the health of our economy. As a result, as long as our economy is growing faster than the debt, our burden decreases and our debt becomes more affordable. Therefore, keeping the debt level low is important, but only so far as it doesn’t slow down our economy.
The stimulus packages were designed with precisely this principle in mind. Taking on debt from these packages prevented far more extensive damage to our economy and put us in a much healthier position to service past, present and future debt. Had this not been an option, we very well could have seen an increase in our actual debt burden as our economy ground to a halt.

Overlook the fact that the federal budget is “unified.”
As Governor Perry loved to remind us during his presidential run, he balanced Texas’ budget during one of the worst recessions in recent history. If elected, Perry promised he could do the same with the federal budget.
But there’s a big difference between state budgets and the federal government’s “unified” budget— states separate their capital and operating budgets. Federal budgets don’t, and it’s this crucial difference that makes a balanced federal budget much more difficult, possibly even undesirable.

Texas is an interesting example of this difference, considering it’s so often touted as a national model. Regardless of what we’ve heard, Texas has actually been taking on more and more debt over the last decade—with the total debt level increasing around 281 percent  from 2001 to 2011, compared to the 234 percent increase in the federal debt level over the same time period.

However, this debt does not show up on Texas’ books because it is largely for capital expenditures, such as the construction of new transportation infrastructure and school buildings for the state’s rapidly growing population. At the federal level, the unified budget combines operating and capital budgets, and, as a result, these long-term investments look the same as any other expenditure.

Unless a balanced budget amendment includes a complete overhaul of how the federal government writes its budgets, such a provision will be nothing more than a massive roadblock to any long-term investments. Ironically, a balanced budget amendment may prevent us from investing in the future generations that this amendment was supposed to protect.

Will inevitably result in more “smoke and mirrors” budgeting.
Texas has had a balanced budget requirement since 1942, but as we’ve seen in recent years especially, our legislators take a very liberal perspective when it comes to drafting a balanced budget. Instead of honestly trying to match revenues with expenses, legislators regularly take the path of least political resistance and make accounting adjustments such as delaying the monthly payment to support public schools and stepping up the tax collection schedule.

This past session, these tricks accounted for $3 billion in “savings,” not to mention the intentional underfunding of Medicaid by approximately $5 billion. As recent history has proven, the presence of a balanced budget provision alone cannot guarantee fiscal discipline.

The truth is there are much more productive, sustainable solutions to the U.S.’s growing deficit than the balanced budget amendment. In fact, once the consequences of such extreme measures are fully considered, it begins to seem anything but balanced. A truly balanced approach requires keeping all tools on the table, not adding unnecessary and perhaps debilitating obstacles to our budgeting process. Solving the deficit problem will be a difficult task by itself. Let’s not complicate it with flawed fiscal policy.

One reply on “Three Reasons Why a Federal Balanced Budget Amendment Is Conceptually Flawed”

You lost me at “the stimulus put us in a better position”. That is very much revisionist history. On what do you base the claims that our debt would be higher without the stimulus? Economists largely admit that the stimulus was a failure, and merely acted as a transfer of wealth to large banks on Wall Street. Taking on new debt during the Obama administration (10 trillion in 2009 to 16 trillion in 2012) has occured as the United States’ international credit rating has been lowered-twice. Coincidence? This additon of debt is not sustainable, period. Think of this as a credit card- If you have 16k in debt, and you want to pay it down, shouldn’t you manage your monthly budget to ensure that you aren’t increasing overall debt?

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