Thursday, August 4, 2011

Balanced Budget Amendments: A Necessary Evil or Bad Public Policy?

Let me start off by saying I do not oppose balanced budgets in and of themselves. In fact, I think governments ought to strive for a balanced budget whenever possible, particularly in good economic times.  That, however, is where I draw the line.  It is not that I favor vast amounts of government spending...I don't.  I do favor necessary government spending and the maintenance of a reasonable social safety net for the poor, the unemployed, those with chronic medical problems, and the elderly.  As a former hardcore conservative I opposed most of these things...I would argue largely due to ignorance and naivete.  Having studied the effects of many social programs over the past 8 years my views have evolved, though I still consider myself quite fiscally conservative.  To be sure, my definition of fiscally conservative is substantially different than what modern conservatives perceive it to mean.  For me it means that government expenditures and revenues should be as balanced as feasibly possible without doing harm to citizens or the economy.  In addition, I want responsive and responsible government.  Like most citizens, I want to pay as little in taxes as I can...with the caveat that I also live in a civilized society and recognize the necessity of some government services that must be paid for through tax revenues.  I want to live in a decent community with decent roads, good schools to send my daughter to, an efficient system of public transit, high quality medical care, a well stocked public library, and the near absence of crime.  Building that kind of society takes money and elected officials committed to a better world.  So I'll gladly pay the taxes necessary to sustain that kind of world.

Having said all that I ask the question as to whether or not amending the constitution is the right approach to achieving that kind of society?  I don't think it is.  Further, I think conservative efforts to bring about a balanced budget amendment, if successful, will actually be destructive of that end and result in a decrease in the well-being of the entire country.  Several Nobel laureate economists agree with that sentiment.  In a letter to the president they wrote:

"While the nation faces significant fiscal problems that need to be addressed through measures that start to take effect after the economy is strong enough to absorb them, writing a requirement into the Constitution that the budget be balanced every year would represent very unsound policy. Adding additional restrictions, as some balanced budget amendment proposals would do, such as an arbitrary cap on total federal expenditures, would make the balanced budget amendment even worse."
 Part of the problem with requiring a balanced budget is that it removes flexibility on the part of the government to respond to a crisis such as a recession.  In times of recession government revenue drops, sometimes precipitously, as it did in 2008 and 2009.  If government lacked the ability to respond to such crises through increased spending (i.e., stimulus) the result would be disastrous.  Many economists believe that without the nearly $800 billion stimulus package President Obama pushed through Congress in 2009 the United States, and perhaps the world, would have plunged into an economic depression.  During periods of slow economic growth government is the only entity with the ability to infuse the economy with enough cash to prevent a depression.  Many conservatives will respond that the stimulus didn't work but that position is largely ideologically driven and ignores the empirical record.  Hundreds of thousands of teachers, police officers, firefighters, and other public service employees are still working today (as well as shopping, eating out, and paying taxes!) who likely would have lost their jobs had the government not had the ability to respond to the precipitous drop in revenues that occurred in 2008-09.  To be sure, the stimulus did not solve the structural economic problems that led to the Great Recession, nor was it designed to do so.  It did exactly what it was intended to do and that was to make the Great Recession somewhat less severe for many citizens.  If conservatives had their way it might look more like 1933 today than 1937.  I say 1937 because that is the year that FDR concluded that the economic stimulus programs implemented in 1933 had worked and it was time to reduce government spending to bring the budget back into balance.  Roosevelt reduced government spending by some 25% the following year.  The result?  The economy plunged back into recession and unemployment rose by 33%. 

Conservatives will argue, disingenuously I believe, that their balanced budget amendment would have no such effect because (a) it could be overridden by a super-majority vote of 2/3 of Congress and (b) it could be ignored in times of war by a simple majority vote.  In the first case, it is nearly impossible to get 2/3 of Congress members to agree on anything, let alone overriding a constitutional amendment and conservatives know that.  So barring a super-majority comprised of liberal Democrats, the amendment would tie the government's hands behind its back during periods of economic slowdown, deepening the recession and causing unnecessary pain to citizens.  On the second point, the amendment would allow conservatives to fight the wars they love without having to pay for them through higher taxes or reduced spending elsewhere.  It is an all around bad deal for progressives specifically and for public policy in general.  Amending the constitution is not the appropriate way to enact the political preferences of a vocal minority.  Robert Samuelson writes:
The Constitution is the repository of the nation’s basic political principles. This is why it commands public respect. What the Constitution is not (and should not become) is a handbook for the day-to-day operations of government. The fatal flaw of the BBA is that it would take the Constitution in precisely this direction. It not only says the budget should be balanced, but one Republican version says it should be balanced at 18 percent of the economy (gross domestic product). That’s not a principle; it’s an instruction. Why not 17 percent or 22 percent of GDP?

None of this should be taken to mean we don't need to get our fiscal house in order because we do.  But the oft cited analogy to the average family needing to balance its budget doesn't apply for a few reasons.  First, most families don't have balanced budgets.  If they did they would never be able to buy a home, a car, or send a kid to college.  All of these things typically require families to borrow money based on estimates of future revenues, which is a good thing.  If American families didn't do this the economy would be much smaller and unemployment much higher.  Secondly, when conservatives employ the analogy of the average family balancing its budget they usually speak only of the need to reduce spending when revenue decreases.  They never speak of the other side of the equation: increasing revenue.  Ironically, a large portion of the debt conservatives are wringing their hands about is directly attributable to the foolish policies they implemented between 2001 and 2006, as this graph from the Washington Post shows:

Enough said for time I'll take a look at the effect balanced budget amendments have on state & local governments.  Be warned, it's not pretty.

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