The Balanced Budget

The accelerating federal deficit is symptomatic of structural flaws in fiscal policy that undervalue the expenses borne by future generations, and a balanced budget amendment is needed to restrict the ability of current lawmakers to place such burdens on future taxpayers. Keynesian economics provided the theoretical foundation for a departure from moral constraints on deficit spending. Flexibility and enforcement concerns are not sufficiently compelling to override fiscal responsibilities to future generations.

Why Ordinary Politics Cannot Balance The Budget:

If fiscal irresponsibility could, indeed, be laid at the feet of particular politicians or parties, there might be some expectation that, with electoral rotation, those who stand for fiscal integrity might eventually replace those who are fiscally profligate. However, such expectation could only be utopian. The fault lies not in ourselves, as participants in the ordinary politics of modern majoritarian democracy, but in the structural rules within which this politics takes place.

As they now exist, these rules allow our political agents to escape the discipline of opportunity cost. 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. It is not the public spending, as such, that is the proper focus of attention here. (The normative question of the dividing line between political and private resource use may be important in its own right, but its introduction into the argument on the decision structure can only be misleading.

The residual Keynesians in our midst, who remain locked into macroeconomic illusion, may continue to suggest that the opportunity costs of public spending must always be borne contemporaneously with the spending itself. They suggest that the valued resources are used up as the outlays are made. However, they forget that those who actually give up resources do so in exchange for valued claims (interest-bearing government securities) against future taxpayers.

A more sophisticated denial of the simple logic of deficit financing is located in the argument that citizens, and their political agents, do, indeed, face the full opportunity cost of debt-financed outlay because they will, quite rationally, discount the future tax obligations that any issue of public debt embodies. in this argument, the temporal displacement of the costs of public spending need not affect fiscal choices. Within this "Ricardian logic," there need be no concern about failures in the basic rules of fiscal politics.

Politicians may be observed to spend without taxing, while the shortfall is made up by public borrowing. However, it may be asked, why is government different in this respect from a private person, or a firm, who may also be observed sometimes to borrow in order to meet spending needs? An important difference lies in the absence of any assigned liability for future payment for servicing and amortizing public debt. The owner of a government bond holds a claim against the general tax base of the political community, not against the income or assets of some identified person or group. There is no effective presence of future-period taxpayers in current-period political choice settings, a presence that might exert some rough balance into the fiscal benefit-cost calculus.

The incentives are such as to generate a regime of fiscal deficits as a necessary consequence of fully rational responses of political agents to the demands of their constituents. This result remains quite robust under many possible variations in the definitions of political rationality and in the composition of political coalitions. There are, of course, upper limits on the natural proclivity of constituency responsive political agents to create fiscal deficits. However, the margin between tax and debt financing that comes to be established in a political equilibrium is well beyond any margin that might be dictated by choices that fully incorporate the present-period interests of future-period taxpayers.

To this point, I have discussed only the direct incentives that exist to bias fiscal choices toward deficit financing of public outlay. These incentives are supplemented by a secondary set that serve to make efforts to behave responsibly in some long-term fiscal sense seem folly.

Assume, heroically perhaps, that a majority of elected political agents, acting on behalf of their constituents, comes to acknowledge the long-term damage of continued deficit financing, and that this majority takes effective action toward reducing or eliminating the imbalance in the budget. Such praiseworthy enterprise would necessarily remain vulnerable in the face of electoral rotation. If the responsibly acting majority coalition could be assured permanence or quasi-permanence in positions of fiscal authority, the deficit-reduction effort might well succeed. However, with constitutionally guaranteed electoral periodicity, there is no assurance that deficit reducing actions (tax increases or spending cuts) taken currently will not be dissipated, wholly or in part, by the actions of other majority coalitions in future periods.

To reduce the budget deficit, costs must be imposed on current-period taxpayers and/or current-period beneficiaries of governmental programs. Taxes must be increased and/or rates of spending must be reduced. There will be predictable electoral feedbacks on those political agents who impose such burdens. Why should current-period agents, even those who fully acknowledge the long-term damage generated by continuous deficit financing, take on the political costs of deficit reduction if they, at the same time, fear that all of their current-period efforts are vulnerable to dissipation by differing political coalitions in future periods? In ordinary majoritarian politics, there is no way through which currently serving political agents can "lock in" or make secure the salutary effects that any action might produce.

The Senate rejected a proposed amendment to the Constitution that would mandate a balanced budget. A balanced budget would have placed greater political power in the hands of minority members, increasing opportunities for obstructionism. Moreover, a balanced budget would have placed emphasis on direct expenditures and taxation to address public concerns, without consideration for alternative and perhaps better instruments.

A bullet dodged. On March 1 the Senate narrowly rejected an amendment to the Constitution to mandate a balanced budget. Although 63 senators voted in support, 4 more votes were needed to approve an amendment that, if ratified, would have been a historic blunder.

We now know, from congressional action in 1990 and 1993, that Congress can cut the deficit. All we need is a president and a Congress willing to work with each other and to compromise. The job is not finished yet, and some nasty choices remain. But why attack the budget deficit with a constitutional amendment when other weapons are at hand - and when the amendment would have promised endless and subtle mischief?

To begin with, the balanced budget amendment would have transformed political power within Congress in ways no one can fully anticipate. It would have substantially increased the power of a determined minority of members. Tax increases would have required support of a majority of the total membership of each house - in other words, a supermajority of those present. Should recession throw the budget into deficit, the version of the balanced budget amendment the Senate considered would have required a three-fifths majority vote to waive the requirement for budget balance. Up to three-fifths of both houses could thus have been held hostage by a determined minority in either house, who could have forced the majority support any particular tax or spending change (increase or decrease) as a condition for supporting that waiver. Placing such power in the hands of a minority is surely bad policy.

Many have decried the capacity of 40 senators to stop the business of the Senate through refusal to stop a filibuster. The balanced budget amendment would not only have extended the range and application of minority obstructionism in the Senate, but would effectively have brought its mixed blessings to the House. Other shortcomings of the amendment, in combination, promised more damage to the political and economic life of the United States than would result from the admittedly deplorable effects of continued federal budget deficits.

For example, the amendment would not have, as promised, reined in the proclivities of elected officials to promote their favorite public objectives. It would simply have penalized two ways of doing so - direct expenditures and taxation - while leaving untouched others, such as loans, loan guarantees, regulations, mandates of private or state spending, or tax incentives. Sometimes regulations, mandates, loans, or loan guarantees are the best instruments to achieve public purposes. Sometimes they are not. The balanced budget amendment would have driven lawmakers to use other strategies even when direct expenditures or taxation make more sense. Why should legislators trouble to marshal three-fifths of both houses to rise spending when a simple majority of those present and voting would suffice for the other strategies? In addition, the amendment did not define what a loan or a loan guarantee or a regulation is or what accounting rules should govern them - thus assuring endless debate about what is expenditure or a tax. And who, finally, would decide? The courts? And what would happen if spending exceeded revenues and Congress refused or was unable to act? Would the courts become de facto taxation and expenditure arbiters?

Perhaps a recent turn in the health care debate was a warning to wavering senators. Congressional leaders and President Clinton have been engaged in unseemly efforts to influence how the Congressional Budget Office classified the mandatory payments for health care required of employers by the president's health care reform plan. The question is indeed of some significance. But it pales beside the central issues of health care reform, which have now been shouldered aside by worries about whether some government accountant records employer payments for health care in the nation's public or private accounts. Right now such questions are confined to the health care debate. But with the balanced budget amendment, they would have become the centerpiece of every debate.

It takes little imagination to understand that the balanced budget amendment would have contaminated virtually every congressional discussion with the sort of debate that has infected the health care debate. The Senate wisely refrained from endorsing procedural changes that would have caused it to spend its time in self-debasing triviality.

Finally, few policies are better calculated to turn economic shocks into major calamities than a balanced budget requirement. One need not be a primitive Keynesian to believe that a requirement forcing tax increases or spending cuts to balance the budget in the middle of a recession could be catastrophic. Yet the need for a three-fifths majority in both houses would have heightened the possibility that such a scenario would result because of incapacity to mobilize that supermajority.

Responsible members of Congress, conservatives and liberals alike, who share a recognition that deficits need to be reduced should now turn to the real work of cutting spending or raising taxes to complete the job begun in 1990 and carried on in 1993.