April 17, 2014

The Bba: A Historic Opportunity Hangs In The Balance

Volume III, Number 4
February 27, 1997


To every member of the Senate: On the eve of a vote that could decide the fate of the Balanced Budget Amendment (BBA), we ask you to reflect on what is at stake. We remind you that the federal deficit has become both a symbol of government's chronic failu re to achieve its goals and a growing burden on the children whose future you so loudly claim to champion. Your choice could well determine whether America can once again steer a fiscally responsible course.

If one looks back at the history of the federal budget from George Washington through Dwight Eisenhower, and excludes only years of declared war or catastrophic depression, the record is remarkable: 106 years of surpluses and only thirty years of deficits . Since 1960, however, the record has undergone a radical shift: just one year of budget surplus and thirty-six years of budget deficits.

Balancing the budget would transform the role of government. Instead of exacerbating the twin problems of low national savings and slow economic growth, government would help to solve them. Long-term budget balance would raise private living standards. It would also increase the fiscal resources available for pursuing public agendas we cannot now afford.

The BBA is an appropriate and effective means of guaranteeing that today's policy choices do not burden posterity. Balancing the budget is a goal Congress has repeatedly tried to achieve through legislation-- and repeatedly failed to accomplish. It is an outcome the vast majority of the American public manifestly want. It may even be necessary to fulfill our dedication to equal rights-- namely, the equal right of each new generation of citizens to inherit the earth, as Jefferson put it, "clear of the d ebts and encumbrances" of the last.

Nonetheless, many have come forward to criticize the BBA. Some of the critics are sincere, while others fear that a more responsible budget will jeopardize the favorable relationship with government they presently enjoy. Either way, they are propagating a series of myths that purport to explain why the BBA would be bad for America. It's time these myths were laid to rest:

Myth 1: The BBA is unnecessary because the deficit is already under control.

Nothing could be further from the truth. While the deficit has declined in each of the past four years, it is scheduled to rise again in every future year. And when Boomers retire, watch out. The Congressional Budget Office, the General Accounting Off ice and the Bipartisan Entitlement Commission all project that if the budget is left on autopilot, deficits will eventually wreck the economy. Under the CBO's most plausible long-term scenario, the deficit would hit 19 percent of GDP by 2025-- enough to devour all the net private savings of the domestic economy several times over.

True, both Congress and the White House profess to be committed to balancing the budget by 2002. But even if this dubious promise is kept, the balance would be temporary. Since none of the current budget plans offers a credible long-term strategy for controlling the rising cost of senior entitlements, none will keep the deficit from exploding again once the age wave rolls in.

Myth 2: The BBA is a gimmick that Congress can easily evade.

If the BBA were a gimmick, it would have been passed long ago. The truth is the amendment would erect a very strong fire wall against deficit spending.

First, the BBA establishes that, unless the balanced budget requirement is waived by super-majority votes, total outlays for any fiscal year shall not exceed total receipts for that fiscal year (excluding net Treasury borrowing). Since there are no ex emptions for special trust funds or other "off budget" spending, there's little room for budgetary end runs. Even if Congress should game this rule, deficits would still be precluded by the amendment's second provision. This fail-safe establishes that the limit on the publicly held debt cannot be raised except by the same super-majority votes.

Yes, critics are right that Congress could try to get around cutting spending or raising taxes by selling off government-owned assets. But so what? No conceivable fire sale is going to raise enough cash to plug a $188 billion deficit hole in 2002. And even if it could, it's hard to see why this would necessarily be worrisome. Reasonable people can differ about how much property the federal government should own. What we all ought to agree is that government should not burden future generations with va st financial liabilities.

Congress could also mandate that state governments or private businesses pay for services the federal budget now provides. Such unfunded mandates may be unwise, but again that's not the relevant issue. Mandates are a back-door route to taxing and spen ding-- not to borrowing and spending. As such, they still force today's adults to pay for today's policies, rather than stick our kids with the bill. Opponents of the BBA are of course right that it would not spare us from making the specific tough choic es needed to balance the budget. But that doesn't make it a gimmick. The purpose of the BBA is not to make our choices for us, but to compel us to choose.

Myth 3: The BBA would invite the courts to meddle in fiscal policy.

Some critics warn that the BBA will become the object of ceaseless litigation, and that, in enforcing the amendment, the judiciary will end up usurping the powers of Congress. This concern is fanciful. In fact, most constitutional experts argue th at it's extremely unlikely that the courts would ever direct overall fiscal policy, much less dictate its minutiae by ordering Congress to cut Social Security COLAs or raise income tax rates.

These experts agree, first, that well-established precedents would prevent most cases from ever reaching the courts; second, that even when standing is established, the courts would be unlikely to find a violation; and third, that even if the courts f ound Congress to be in violation of the BBA, they would be unlikely to mandate a specific remedy. Instead, they would simply direct Congress to go fix it. The courts will be especially reluctant to meddle in fiscal policy because the BBA expressly enjoins Congress to enforce the amendment's provisions through appropriate implementing legislation. Presumably, this legislation would spell out the specific procedures (for example, sequestration) to be followed in the event that the BBA is violated.

Confronted with this logic, critics sometimes take the opposite tack. The real danger isn't meddling by judge Draco, they say, it's that the BBA won't be enforced at all. These critics need to be reminded that the Constitution imposes many obligations on Congress-- from apportioning representatives to carrying out the Census --that the courts are rarely called on to enforce. Yet Congress still upholds the Constitution. After all, members take an oath to do so and are accountable to the sovereign ele ctorate if they fail in that duty.

Myth 4: The BBA would make recessions worse.

Whenever the economy slows, federal tax collections automatically fall and federal outlays -- most importantly -- for unemployment insurance and welfare benefitsrise. These so-called automatic stabilizers stimulate the economy and mitigate the downtu rn. The critics' concern is that the BBA would short-circuit the stabilizers by forcing tax hikes or spending cuts at precisely the wrong moment in the business cycle.

This need not happen. If Congress wants to preserve the stabilizers, it can always choose to run modest budget surpluses during periods of economic expansion-- a sensible policy goal for our aging society in any case. When the economy slows, the budg et would revert to mere balance. Or better still, Congress could use these surpluses to build up a sizable "rainy day fund." Instead of buying back the national debt during economic expansions, it would invest part or all of the surpluses outside of the f ederal budget. This fund would then be available to cover unanticipated cash shortfalls; there would be no need for last minute spending cuts or tax hikes that put the government on a "fiscal yo-yo."

Many of those who fret that the BBA would prevent Congress from employing counter-cyclical fiscal policy forget how such policy is supposed to function. According to Keynesian theory, the federal budget should run deficits during recessions and surplu ses during expansions-- that is, it should run surpluses most of the time. Now we run deficits all of the time, and the stabilizers simply cause the federal balance to go up and down under water. A rainy day fund would return us to the original Keynesian rule by ensuring that cash shortfalls can never exceed prior-year accumulated surpluses.

Myth 5: The BBA would prevent future Congresses from responding to national emergencies.

It's hard to see why. The BBA provides that Congress can waive the amendment in time of war by a simple majority vote. And it can waive it anytime if three-fifths of the whole number of each house vote to do so. Yes, the super-majority requirement would raise the hurdle for running a deficit-- which is precisely its purpose. But, in an age when Congress overwhelmingly votes to approve special spending for even minor calamities, it is absurd to think the BBA would prevent government from respondin g to genuine emergencies. When Congress last voted on a disaster supplemental (for Midwest flooding), it passed the House by 400 to 27 and passed the Senate by unanimous consent.

A related concern is that the BBA's super-majority rule would allow a minority of lawmakers to hold everyone hostage to some special agenda. This concern is vastly overblown. Right now, Congress frequently needs to muster super-majorities-- for insta nce, to close debate in the Senate. The BBA's hurdle is high enough to ensure that the amendment is not waived lightly. But it is not so high that it allows a handful of recalcitrants to tie Congress' hands.

Myth 6: The BBA's cash-accounting framework is arbitrary.

Perhaps, but no more so than any alternative framework. Cash accounting is used in the BBA because that's the way the federal government has managed its budget for over 200 years-- and because it avoids the manifold definitional and valuation pro blems of accrual accounting.

Cash accounting makes no special provision for investment spending, and some critics think this is a big problem. State balanced budget requirements generally exempt capital expenditures. Without a similar exemption, the critics fear, a requirement to run a cash balance would force us to run an accrual-accounting surplus.

But hold on. The federal government allocates a much smaller share of its budget to investment than do the states. In 1996, just 4.5 percent of outlays went to direct tangible investment --and most of this went to defense, where it's unclear how accrual- accounting concepts could be applied. What's left over almost vanishes once depreciation is figured in. Net nondefense investment comes to less than 0.1 percent of the budget, an amount of no relevance to overall fiscal policy.

Critics sometimes object that "investment" should be broadened to include such items as research and education, or even health and social services. This broadening would depart from state usage. And the clear threat it would pose to fiscal discipline (if almost anything could be called an investment) is one reason why Congress has steered clear of capital budgeting.

Advocates of the BBA by no means oppose public investment. But we disagree that cash accounting does much to discourage it. Throughout our history, Americans have done things for the sake of posterity without requiring posterity to pay for them. What's mo re, there is little evidence that cash deficits encourage investment. Deficits have ballooned since the 1960s, but federal investment as a share of GDP has fallen.

There's another item the critics forget. Consistent accrual accounting would force us to acknowledge, on the other side of the federal ledger, a mountain of social insurance liabilities yet to come due. Any plausible method of amortizing this lien on our future (now totaling at least $15 trillion) would reveal our true accrual budget to be deep in the red. In other words, if the BBA weighed liabilities as well as assets, the budget would have to run sizable cash surpluses in order to achieve an accrual-accounting balance. The final policy result would run directly counter to what the critics assume.

Myth 7: The BBA would jeopardize popular programs.

Wrong. When necessary, the BBA would lead to cuts in the least popular programs -- or to hikes in the least burdensome taxes. The widely repeated claim that the amendment would somehow require cuts in Social Security is nonsense. (See our fax alert of February 18.)

Obviously, all federal programs are "popular" so long as we don't have to pay for them. The virtue of the BBA is that it would force us to rank our spending priorities and then weigh them against our willingness to be taxed. This will entail some real sacrifice -- but no more than balancing the budget without the BBA.

Some say the BBA would make federal "shut-downs" more likely. To the contrary, shutdowns happen when fiscal rules are so uncertain (as they are today) that legislators are encouraged to play chicken-- betting that, in the end, Treasury can always bor row more. The certainty of the BBA would put an end to such games. State governments have amassed thousands of years of cumulative experience with BBA-like rules and show no special propensity for shutdowns.

Critics who complain that a functioning BBA would inflict intolerable pain make one wonder if they really want to balance the budget at all. Their complaints are the very reason we need the amendment.

Myth 8: The BBA would trivialize the Constitution.

There are some who say it would be unseemly to have language about mere budget policy blighting the majesty of the Constitution. In their view, nothing like the BBA would ever have occurred to the Founders.

But this is untrue. The BBA is one of the few constitutional amendments proposed since the Bill of Rights that many of the Founders themselves pondered. "From the earliest days of the Republic, the idea of balancing the federal government's budgets ha s played a central role in American political life," writes historian James D. Savage. Many of the Founders feared that the unchecked power of Congress to borrow would undermine republican virtue and forever subject posterity to the Old Regime. The issue, as Jefferson said, is "whether one generation of men has a right to bind another."

For most of the next two centuries, Congress functioned under the clear presumption that deficit spending was morally wrong. And when it did incur debt, typically during wartime, it paid it down as soon as possible. But over the last thirty years, gov ernment has abandoned this principle. The explanation may lie in the vast growth in the size of government, or in the proliferation of special interests that directly benefit from deficit spending, or in the decline of America's traditional ethic of thrif t. But whatever the explanation, when a vital principle goes unobserved it's time for a constitutional safeguard. And today it's time for the BBA.

FACING FACTS AUTHORS: Neil Howe and Richard Jackson CONCORD COALITION EXECUTIVE DIRECTOR: Martha Phillips

The Concord Coalition web pages were designed by Marla Parker and Krista Reymann. These pages are now maintained by Craig Cheslog. . Last updated: 24 Apr 1997