July 14, 2011
by Diana Furchtgott-Roth
Moody's threatened to downgrade American debt on Wednesday, as Congress appears unable to decide on a package of spending cuts and tax reform in exchange for raising the debt ceiling. In Europe, Italy and Spain are on the cusp of joining Greece as beggars for bailouts.
As the White House and congressional leaders thrash about, groping for a way to cut spending and raise the debt ceiling, the House and Senate are expected next week to address fundamental budget process reform by voting on a proposed constitutional amendment to require balanced budgets.
A balanced budget amendment would be better than what we might face now, namely potential fiscal chaos as interest payments are forced to rise if the debt is downgraded.
The constitutional amendment is sponsored in the House by Republican Representative Bob Goodlatte of Virginia, with 133 cosponsors. The Senate sponsor is Minority Leader Mitch McConnell, with 46 cosponsors.
If each chamber gives a two-thirds supermajority to the proposed balanced budget amendment, it then goes to the states. Approval by three-fourths of them, or 38, is necessary. The most recent amendment, the twenty-seventh, was ratified in 1992, and holds that salary increases for members of Congress can take effect only at the start of the next House term.
Congress has from time to time considered balanced budget amendments. Six did not pass either chamber. The Senate approved one in 1982, sponsored by South Carolina Senator Strom Thurmond. The House passed one in 1995, sponsored by Texas Representative Joe Barton. In each instance, the sponsor was a Republican and the GOP had a majority.
Congress is not expected to pass a balanced budget amendment next week. But consider that if prior amendments had passed, it's likely that today America would have been in a far stronger fiscal position, without trillion dollar deficits and near-100 percent levels of public debt.
The proposed amendment would require the president to submit a balanced budget to Congress every year. It would not allow spending in a fiscal year to exceed projected receipts for that fiscal year. Outlays would be limited to 18 percent of projected current national economic output.
As written, the balanced budget amendment depends on the accuracy of forecasters. If revenues or GDP falls below forecast, the amendment might be violated-with no mechanism to cut back excess spending. For that reason, critics of such an amendment portray it as more symbolic than binding.
And yet, those of us who are most dedicated to rein in government spending believe that even with its imperfections, a balanced-budget amendment would be a step in the right direction.
Under the proposal, a three-fifths majority of all members in each chamber would be required to increase the public debt, or authorize additional spending over what had been specified.
Revenue increases by virtue of tax legislation and any outlays above 18 percent of economic product would have to be approved by two-thirds of all members of each chamber.
One can quibble with details of this proposed constitutional amendment, but the philosophy behind it is laudable.
A balanced budget amendment would impose spending discipline, and would protect the American economy against the down-to-the wire bargaining over spending and taxes that is a habitual feature of our budget process.
And it's clear that we're in disarray. Just look at the headlines in today's papers on the tangled debt-ceiling negotiations. Or the headlines last December, when taxpayers did not know what tax rates they would face on January 1. Although a two-year tax package was passed at the end of 2010, some members of Congress are today trying to revisit tax hikes. Is this any way to run America?
Additional certainty about fiscal policy would make investment and consumption decisions easier, and would facilitate economic growth and job creation. With unemployment at 9.2 percent, after cumulative deficits of trillions of dollars, we clearly need another path.
What we've seen since World War II is that the government is profligate and incapable of disciplining itself when it comes to spending. It writes laws that lead to increased spending over time without further congressional action, so-called entitlements such as Medicare and food stamps.
The proposed amendment is perhaps too flexible, allowing room for raising spending. Balanced budget provisions are waived for any year in which a declaration of war is in effect, or when the United States is engaged in military conflict. Then, a simple majority of members in both chambers can waive the amendment.
Yet for the past 10 years we have been engaged in military conflicts in Afghanistan, Iraq, Libya, and Somalia. Hence, as worded, the current version of the amendment would have been already overridden. In my opinion, an exception should be made only for a declaration of war.
The balanced budget amendment depends on current estimates of receipts and spending, because outlays are prohibited from exceeding receipts in the same year. But neither Congress nor the Treasury knows exactly how much revenue will come in. In some years, especially in recessions, revenues fall short of projections. In boom years, as in the middle of the last decade, revenues may exceed the forecast.
Another way of structuring a balanced budget amendment would be to tie spending in a given year to revenues two years earlier. This would mean that the president and Congress would know in advance and unequivocally how much money to spend.
So now, in the summer of 2011, as Congress is debating the fiscal 2012 budget, it would know that it could not spend more than revenues from the fiscal year 2010 budget, which ended September 30, 2010.
Pegging spending to past revenues might reduce Congress's incentive to raise taxes, because additional revenue could be spent only two years hence, after the next election. So even if two-thirds of members wanted to raise taxes, they could not spend the money right away, giving them a disincentive to do so.
Most members of Congress were elected on a platform of spending cuts, although not all had the same cuts in mind. Why wait until we lose our AAA credit rating? Some form of balanced budget amendment would improve the budget process and put spending on a lower path.
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, was a Senior Fellow at Hudson Institute from 2005 to 2011.
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