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Do We Need A Balanced Budget Amendment?

Day 2 of 5
By Melvin Dubnick
PoliticsNow Classroom, Feb. 18, 1997

In round two of our Exchange, Karen Paget focuses on economic issues and budget balancing strategies. She points out that the deficit-reduction strategies of the Bush and Clinton administrations were (and are) appropriate and successful responses to existing conditions. Citing evidence regarding the complex relationships between government deficits and the economy, she expresses deep concern about the wisdom of both zero-deficit legislation and balanced budget amendment strategies. Her bottom-line advice for those who are considering various options is to "check it out."

In his second round contribution, Tim Penny responds favorably to some of the key points Karen Paget raised on Monday. But while agreeing with her that many of the popular arguments made in support of a balanced budget amendment are questionable, he believes she is misrepresenting what the BBA will do. The proposed amendment would not stop the federal government from generating a budget surplus, he observes, nor does it necessarily endanger popular "safety net" programs that act as counter-cyclical economic stabilizers. For Penny, the bottom line remains the generational issue.

Richard Lamm focuses his second round response on the argument that the BBA would reduce fiscal policy flexibility. While Keynesian-based economic policy worked well at first, it requires a degree of fiscal discipline that today's policy-makers just do not possess. The BBA would provide that discipline.

Dick Lamm:

There lies buried in the breast of every politician the heart of Juan Peron. Give us a chance and we will sell out the future for present popularity, and we will continue to act that way to the ruinous end of our countries.

Thus Keynesian economics, while it worked at first, cannot be relied upon. The temptation is too great. The immediate rewards are too great and the consequences too distant. Thus the argument about the balanced budget amendment taking away "needed flexibility with fiscal policy" fails. Such fiscal policy requires a symmetry-both surpluses and deficits. Deficits to help cure unemployment, surpluses to cure inflation.

We have gone 29 years without a surplus. We lack the fiscal discipline to use this tool-even assuming it works. In reality it has a bias toward deficits and toward selling out our children.

Thus the world has changed since the 1930s.. This "tool" of fiscal policy-in the long run-will not promote economic stability, but economic instability.

We need a constitutional backbone.

Karen Paget:

Dick and Tim's opening statements raise a host of important issues. In this response, I'd like to focus on economic issues, particularly the issue of debt, and the relationship of issues to policy choices.

First, three policy choices must be distinguished one from another: a) deficit reduction strategies; b)zero deficits (balanced budgets achieved legislatively); and c) a balanced budget amendment to the Constitution. These are three, distinctively different, policy options that are available to policy-makers who must struggle with the issue of government debt.

Unfortunately, I find that the differences between these choices have been utterly collapsed in contemporary debate. As you consider the debate this week, ask yourself WHICH policy option is a solution to WHICH problem.

In determining how serious a problem debt is, the most important measure is the debt to GDP (Gross Domestic Product) ratio. Now, this is the point at which most of us want to bail out of the policy debate. But, hang in, because these measures go to the heart of the policy choices confronting us.

Most economists argue that an acceptable level of deficit spending is two percent or less of GDP (Gross Domestic Product). For the fiscal year 1996, the debt to GDP ratio was 1.4 percent, well inside the acceptable level. The 1980s deficit levels exceeded this ratio, rising to a high of 5.1 percent in fiscal year 1986. But, consider: even during this period of time, when I and others agree the deficits were unwarranted and too high, national wealth grew. Could the economy have grown more if there were no debt? The most common answer given by economists is that such high deficits were probably a "modest drag on the economy."

The deficit-reduction strategies during the last few Bush years, and the more aggressive deficit-reduction strategies during Clinton's presidency, were appropriate and brought the deficit down to where it is today -- below 2 percent. Indeed, the deficit, measured as a percentage of GDP, has shrunk more than 70 percent over the past 10 years. I'm tempted to say, "lesson number one," because it is imperative that we distinguish between high deficits and low deficits.

What about the scary claims that an amendment is needed to avoid "inevitable economic collapse?" There simply is no evidence that claim is true. Rather to the contrary. A Congressional Budget Office study, a bipartisan arm of the U.S. Congress, conducted in 1996 concluded that if the deficit is held to about two percent of GDP, total income per person will grow 41 percent between now and 2030. Now, what is interesting is that CBO ran the same analysis but changed the two percent deficit assumption to a balanced budget assumption to see what difference that would make to the economy. The surprising answer is that the economy would grow by 43 percent if deficit spending were prohibited. A two percent differential in economic growth does not warrant the strait-jacket amendment.

These, and numerous other reasons, convince me that the a wise course of action is to control deficit spending, keeping it below the critical two percent level. In other words, a deficit-reduction strategy is a good policy option and a good solution to high deficits. Both Bush and Clinton should be applauded.

Let's take one other posited economic relationship: the relationship of deficit spending and interest rates. Here's what you'll hear during the debate: deficit spending means that government borrows more, driving up interest rates; in turn, high interest rates brought about by government borrowing means that there is less capital available for private investment. That's what I was taught in Econ.101. What does the empirical evidence suggest? The evidence suggests that there is no precise relationship between deficits and economic growth, or between deficit spending and interest rates.

Consider: we know that our economy grew like gangbusters after World War II, but our debt level was more than double our current one. The worst interest-rate crisis of the postwar era, in the late 1970s, occurred when the debt-to-GDP ratio was near a postwar low. In the recent period of relatively high debt, since 1990, interest rates have steadily fallen.

I've been told that journalists are taught "if you're mother says she loves you, check it out." I know we're on difficult terrain here--and there is a whole lot more to say about the subject of debt--but, since choosing among the policy options of deficit control, legislative balance, and an amendment is among the most important choice a citizen or policy-maker will ever make, it behooves us all to "check it out."

One final word in anticipation of future remarks. Dick is correct to worry about the rate of spending in the Medicare and Social Security programs. That growth, at its current rate, is unsustainable over time. Both programs need restructuring. But, as you might guess by now, I do not see that the balanced budget amendment is a solution to spending problems in those two programs.

Tim Penny:

I was pleased with Karen's decision to debunk the most popular arguments in favor of the balanced budget amendment. In doing so, she strikes at the heart of politics as practiced in the modern era: find a rationale that resonates with the electorate and milk it to the max, even though it may not be valid. During my years in politics, I often saw bad ideas cloaked in popular rhetoric. A thoroughly serious idea, adding an amendment to the Constitution, is cheapened by this soundbite approach to the debate.

Karen effectively rebuts two commonly used justifications for a BBA. I concur with Karen that it is ludicrous to compare household budgeting to federal budgeting. I also share Karen's view that state-level balanced budget requirements are generally irrelevant to the national debate. She accurately points out that most state-level prohibitions exempt capital budgets or have other "loopholes." Nonetheless, I do think it relevant that virtually every state has some sort of balanced budget requirement in their constitution. I t does speak to the sense of fiscal prudence which seemed to dominate the American consciousness until recent times.

However, I was disappointed to see Karen dismiss the idea of a balanced budget amendment as if it were no more than a fringe notion that has only recently-and mysteriously-gained broader acceptance. I would caution that this line of argument could also be used to dismiss the idea of an amendment to free the slaves or to grant voting rights to Blacks and women. These proposals, too, were once merely fringe notions but gradually, and thankfully, garnered wider acceptance and ultimately found their way into the Constitution.

Karen mistakenly represents the BBA as not only prohibiting deficits but also prohibiting surpluses. She asserts "that under its terms the federal government could not save." To the contrary, the BBA provides that "total outlays shall not exceed receipts." No where does it say that total receipts shall not exceed outlays. (In fact, given our current indebtedness it would be highly desirable that annual revenues be sufficient to begin paying down the principle of our national debt.)

The BBA further provides that public debt should not be increased without a three-fifths vote, but again, does not require any super-majority vote to run a surplus.

Karen's final point stresses the role of the federal government as an "automatic stabilizer" in times of economic downturn. Here she endorses the entitlement nature of many programs. I will admit that my greatest concern about entitlement spending lies with those programs-like Social Security and Medicare-which are not means-tested (or as Concord Coalition President Pete Peterson like to phrase it "affluence tested.") These middle-class entitlement programs are growing beyond our means to finance them and represent virtually all of the trillions in unfunded liability that will fall on the shoulders of future taxpayers. I am far less alarmed about the programs, such as foodstamps and unemployment compensation, which provide a safety net and which necessarily cost more when the economy turns sour. On a year to year basis, the costs of these counter-cyclical subsidies can be easily managed-especially given the fact that for the most part economic recessions are now regional rather than national. During my 12 years in Congress, I cannot recall a time when the extension of the unemployment benefits or an increase in foodstamps failed to receive a 60 percent vote in the House and Senate. Politicians are loathe to vote against the needed funds for these safety net programs in the midst of a recession-even if it leads to a modest deficit.

When I was first elected to Congress in 1982, I was opposed to a balanced budget constitutional amendment. Like Karen, I felt that most of the arguments in favor of the proposition missed the mark. Over time, I came to view the proposal in generational terms. In that context, I came to much the same conclusion Dick Lamm. He borrowed former Senator Warren Rudman's words to describe the BBA as a "bad idea whose time has come." Though I no longer consider it a bad idea, I am now convinced that it is long overdue.