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Do We Need A Balanced Budget Amendment?

Day 3 of 5
By Melvin Dubnick
PoliticsNow Classroom, Feb. 19, 1997

In this third installment of the Exchange, Richard Lamm notes his agreement with Karen Paget on most points but indicates the lack of fiscal discipline remains his central and overriding concern. Whatever the reasons were for relying on deficit spending in the past, it is time to adapt to the realities of government having an alcoholic-like dependence on spending more than we take in. "We need to restore balance to the process," he argues-and the balanced budget amendment is the way to achieve that.

In his Wednesday contribution to the Exchange, Tim Penny focuses on the issue of whether Social Security ought to be exempted from the proposed amendment. He argues that this would be a bad idea, especially in the long run. It would, in effect, allow a massive deficit to emerge and provide a means for circumventing the amendment's intent. Even in the short run, he contends, the Social Security exemption is a flawed idea.

In her Wednesday contribution, Karen Paget addresses the idea that the BBA is the solution to budget problems. To the contrary, she argues, by forcing policy makers to set priorities the BBA will only be the start of debate over budget choices. What is on or off the table in such a debate will be a key issue, and setting priorities among those things left on the table will be extremely difficult. Paget also raises the idea of a capital budget for the federal government-a move she claims would immediately put the federal budget in surplus. Finally, she offers a point of clarification, noting a difference between the use of deficits as part of a Keynesian economic strategy and their relationship to "automatic stabilization" policies.


Dick Lamm:

The most important, but the most difficult challenge facing every generation is to correctly assess and solve the new dangers they are faced with. We know yesterday's dangers; it is hard to know tomorrow's. We tend to steer the ship of state by looking in the rearview mirror.

Opponents of the balanced budget amendment have many valid points. I tend to agree with most of Karen Paget's arguments. But my main point is that the dangers of not passing the balanced budget amendment are greater than the dangers of passing the balanced budget amendment. True, we do know that Keynesian solutions were important in the l930s and the l940s. But that was back when we were an exporting nation with a small federal debt. Today we are an importing nation with a gargantuan federal debt. I believe passionately that one of the great challenges of my generation is to recognize the news dangers we're surrounded with. Today we know that the political process cannot control the temptation to deficit spend. Deficits have gone from being a public policy asset to being a great public policy danger.

One drink a night (we are now told) can add to your health. So also in times of economic downturn a deficit can be useful. But many drinks made an alcoholic, and endless deficits will form a fiscal iceberg that is likely to sink our economy. America's political process is run by fiscal drunks. They can't stop running up deficits.

New occasions teach new duties, time makes ancient good uncouth, says the poet James Russel Lowell. Time does make ancient good uncouth. We must recognize that our political system does not have the discipline or the backbone to handle the temptation that deficits pose. Yesterday's solutions (if, indeed, they were solutions) have become today's problem. The reason we need a balanced budget amendment is not because families or states have to balance their budgets. Those reasons Karen correctly criticizes. But the empirical evidence of the last 30 years is that deficits are too tempting. Keynes had two wheels on this bicycle-surpluses and deficits. But we have thrown away one wheel (surpluses) in practice and the vehicle will not run on one wheel. We need to restore balance to the process.


Karen Paget:

At the risk of repetition, I'd like to restate the three policy options I distinguished yesterday: deficit reduction; legislatively-achieved balance; and a balanced budget amendment. One of the difficult aspects of debating the latter option, an amendment, is that distinctions among these choices are collapsed. Similarly, a number of different problems, all requiring attention, are presumed solved or dealt with under the terms of an amendment. They are not.

For simplicity's sake, let me state my position in a slightly different manner. I am in favor of deficit-reduction strategies when deficits become too high. I am firmly opposed to a balanced budget amendment because none of the popular or economic arguments stands up under scrutiny. (I recognize that the political argument-save me from saying yes to my constituents-is also popular, but I see that as a leadership problem.)

Now, let us turn to the second option, to the much more difficult question of actually balancing the budget, and to the choices that will entail. The adoption of a balanced budget amendment says nothing about these choices. In fact, adherents often give the impression that once it is passed, presto, the budget is balanced. At the very least, it tends to obscure what policy choices would have to be made within a balanced budget framework.

The option or goal of a balanced budget (as distinct from the amendment) falls into the gray area that Dick spoke of in his opening soliloquy that he appropriately labeled "Hamletesque." A significant bipartisan consensus now exists in Congress that balance should be the goal; indeed, both parties have agreed to balance the budget by 2002. Why 2002? When this target date first appeared, it was a political decision, made by the Republicans. That doesn't make it "wrong"-I just want to make the point that it was a political, as distinct from an economic, reason.

But, for the sake of argument, let's accept the 2002 target. The strongest argument proponents of a balanced budget have is that it will force policy-makers to set priorities. Priority-setting raises a new set of questions: Whose priorities? Will those constituencies with clout be able to protect their programs, leaving other worthy, but less powerful, needs unmet?

One of the biggest problems with balancing the budget currently is how much is off the table, immune from reductions: defense (down, but still 85 percent of Cold War levels), Social Security and Medicare. Will we scrap much of the safety-net programs for middle class programs? Tough problems-difficult solutions-important discussions. A balanced budget amendment does not solve these problems, nor does it make the trade-offs between and among programs. A budget isn't about numbers; its about what and who we value.

To end on a provocative note: what if the federal government had a capital budget, similar to the states? One answer is that the budget would be in surplus even as we speak, and we probably wouldn't be having this debate.

And a couple of dangling points from previous responses: I think Tim confuses Keynesian notions of fiscal stimulus with the federal role of "automatic stabilizer." There is considerable debate today over whether or not Congress really can effectively "prime the pump" through fiscal stimulus--remember the debate over President Clinton's fiscal stimulus package in 1993? Some economists argue that Congress can't act in a timely enough fashion. Others disagree. But, food stamps and unemployment insurance are different. They are programs that respond to individual needs, i.e. a qualified individual gets them automatically when laid off. Neither state legislatures nor Congress "votes" in any given instance, precisely because this aid is "automatic." I would re-emphasize my earlier point: it takes analysts and policy-makers some months to know whether rising case loads constitute a "blip," a recessionary "trend" or a long-term trough (depression).


Tim Penny:

One balanced budget amendment variation that has received a great deal of attention is the idea of exempting Social Security income and expenditures from the balanced budget requirement. This would be a terrible idea.

Those who favor exempting Social Security focus on the fact that the Social Security system is presently running a surplus that is keeping the unified deficit much lower than it would otherwise be. Thus, the argument goes, the Social Security Trust Fund is being "raided" for purposes of masking the true size of the deficit and it should be protected.

It is true that under current projections Social Security will be in the black for another decade or so. But constitutional amendments are not, and should not, be drafted for the short-term They should be statements of principles, capable of timeless duration.

If we look out a few years beyond the traditional budget window of five to 10 years, it becomes apparent why exempting Social Security from the budget calculation would soon blow a gaping hole in the constitutional requirement of a balanced budget. Social Security surpluses are projected to peak around 2010 and thereafter head steeply downhill.

By 2020, under the trustees "intermediate scenario," the Trust Fund is projected to turn negative and the annual operating deficit is projected to be $216 billion. By 2030, the year after the Trust Fund is projected to be depleted, the operating deficit is projected to exceed $700 billion-in that one year alone! This is the sum that the Treasury Department would be able to borrow from the public that year and still remain true to the "balanced budget" requirement.

A balanced budget requirement with an exemption that massive is no requirement at all.

Further, the exemption would provide an irresistible opportunity to turn the Social Security Trust Fund into the world's largest money-laundering scheme. Because there would be no rule to prevent the Trust Fund from running a deficit, Congress could engage in deficit spending any year it wanted to by the simple expedient of redefining what is designated "Social Security."

This could be done by taking earmarked revenues out of the Trust Fund, or by labeling other federal outlays and shifting them into the Trust Fund. All that would be required is a majority vote of Congress and the red ink could flow without limit.

Even if one looks only at the short term, the Social Security exemption is badly flawed. For one thing, if the amendment were to be enacted with a provision exempting Social Security from the deficit calculation, Congress and the Administration would have to save more from a smaller share of the budget to comply with the zero deficit requirement.

For example in 2002, the earliest year the constitutional requirement might take effect, the CBO projects that the unified budget deficit will be $188 billion and that the Social Security surplus will be $104 billion. Thus Congress and the administration would have to agree on spending cuts or tax increases that year of $292 billion (with the exemption) rather than $188 billion (without it).

Exempting Social Security from the balanced budget requirement would write a deficit allowance equal to the program's long-term operating shortfall into the Constitution. Quite frankly, any exemption to the balanced budget amendment would complicate its judicial interpretation and make its enforcement more difficult.

Every federal tax brings revenue to the government, and every federal program costs money. No program, no matter how important or popular, should be freed from having to compete with other programs by giving it constitutional stature.