Businessweek Archives

Did You Hear The One About The Balanced Budget?


Economic Viewpoint

DID YOU HEAR THE ONE ABOUT THE BALANCED BUDGET?

It would be comical if it weren't so serious. Yes, fans, the folks who brought you a $269 billion deficit in fiscal year 1991 and are pushing $400 billion in 1992 now are poised to pass a constitutional amendment mandating a balanced federal budget. Unless this legalistic lunacy is stopped, it may pass both houses of Congress in a month or two and be sent to the state legislatures for ratification. Since many states are eager to ratify, this abomination could become law in record time.

But why call it an abomination? Isn't the deficit too high? And hasn't the U.S. political mechanism shown itself incapable of dealing with it? The answers are yes and yes, but the constitutional cure is worse than the budgetary cold.

Let me start with the problem that is at once the most obvious and the most serious. As everyone should know by now, recessions swell budget deficits by reducing tax receipts and raising expenditures on items such as unemployment insurance. Under a balanced-budget amendment, Congress would be required to raise taxes, cut discretionary expenditures, or do both whenever the economy weakened--thereby aggravating slumps and making recoveries harder to sustain.

The House version at least limits outlays to estimated receipts rather than actual receipts, so a recession that takes us by surprise would not require a contractionary fiscal response. But the Senate version is based on actual receipts and has no such virtue.

DRACONIAN MEASURES. The recent recession provides a sobering example of how things might work out in practice. In January, 1991, the Administration projected a $318 billion deficit for the fiscal year ended Sept. 30, 1991. Had the balanced-budget amendment been in effect, Congress would have had to pass spending cuts and tax hikes totaling much more than $318 billion, because such draconian fiscal measures would surely have deepened the recession and depressed tax receipts further. What was a relatively mild, though long-lasting, contraction might have developed into a whopper. Why inflict this on ourselves?

Supporters note that the balanced-budget requirement could be overridden by a three-fifths vote of both chambers of Congress, with the House version also providing for a waiver in case of declared war. So the amendment could be waived when compliance would be most harmful. That's comforting. But why write into the Constitution something that we routinely expect to suspend?

The problems do not end there. Budget balance is a shibboleth, supported by no sensible economic principle--especially not when gross domestic product, private debt, and business debt keep growing year after year. And the myopic focus on the federal deficit, to the exclusion of state and local deficits, is curious when the federal government sends the states about $150 billion in aid each year.

Even if we somehow decided that a deficit of zero is the right target, the current federal accounting system is hardly the best way to keep score. To cite just two examples, it draws no distinction between current operating expenses and capital expenditures--which are routinely separated in state and local budgets. And it fails to recognize that inflation, by reducing the real value of the outstanding national debt, automatically yields tacit revenue to the government. Shall we enshrine neolithic accounting practices in the Constitution? Or shall we amend the Constitution each time accounting practices change?

SPENDING LIMIT. Other objections are procedur-al and constitutional. Under a balanced-budget amendment, Congress might mandate actions by others rather than spend money itself. More items would surely be moved off-budget. The price, in both cases, would be less oversight and political accountability.

Then, we must remember that America is the most litigious society on earth. Just imagine the lawsuits that would be filed alleging that Congress had violated the amendment in letter or spirit. The prospect of economic policy being made by judges, rather than by Congress, may appeal to some. But it is certainly not the way that powers are assigned by the Constitution.

Supporters claim that most states live with balanced-budget requirements now. Leaving aside the humorous notion that the states are models of fiscal rectitude, this assertion is quite wrong. State governments balance their operating budgets but finance capital expenditures by issuing debt.

The closest thing to a valid argument in favor of the amendment is that forcing Congress to finance all expenditures by taxation would limit spending--an outcome with evident appeal on the political right. But is it true? The fact that state and local spending has grown faster than federal spending for decades should give pause. And there is surely a more straightforward approach with fewer undesirable side effects: Pass a law limiting the growth of spending.

They say you can't beat something with nothing. So, I conclude with my own substitute amendment, combining the two worst constitutional ideas of the 1980s: Let's amend the Constitution to require children to pray for a balanced budget in the schools.ALAN S. BLINDER


The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus