The Balanced Budget Farce

During the 104th Congress, just two Senate votes prevented a balanced budget amendment to the Constitution from being sent to the states for ratification. Now, with the recent election of a more conservative Senate, that paper-thin margin appears to be gone, and Republican leaders are once again trumpeting their ill-conceived gimmick.

Balanced budgets are fine for a strong economy. But to mandate a balance in times of economic decline would make a weak economy even weaker. During a downturn, government revenues fall as demands for transfer payments rise, requiring a temporary increase in deficit spending. Under a mandated budget balance, however, this fiscal stabilizer vanishes and leaves in its place an economist's nightmare: a budget that must be balanced, but no revenue to do so. The only two alternatives in this case are to raise taxes or cut spending -- both of which serve to exasperate rather than temper recessions.

This is exactly what happened during the Great Depression when President Herbert Hoover made balancing the budget his top priority. The economy slipped into recession during the late 20s and government revenues began to plummet, as they always do during tough economic times. Hoover was forced to raise taxes and cut spending in order to balance the budget, and as a result the country plunged into a deep, prolonged depression. Only after President Franklin Roosevelt began deficit spending in earnest did the economy start to bounce back.

Many supporters of the balanced budget amendment recognize the need for countercyclical spending, but claim to have an answer: Write into the amendment an out in which a three-fifths vote by Congress could suspend the mandated balance and thereby allow deficit spending. This approach, which was included in the last proposed budget amendment, is intended to provide flexibility to something that is inherently inflexible; if it's flexibility you want, what's wrong with what we have right now?

By requiring a three-fifths vote, Congress -- already a slow-moving machine using simple majority votes -- would be unable to take the swift action necessary to handle economic downturns. It's not difficult to picture a minority group of legislators holding the majority -- and the economy -- hostage in order to gain concessions. This scenario would be more dangerous today than ever before, as recessions are increasingly regional; putting together supermajority support for deficit spending when just one part of the country is hit hard by recession might be impossible.

Presently, federal spending kicks in automatically when states go into recession and caseloads for programs -- such as unemployment insurance, food stamps, and Medicaid -- rise. During the slow-growth period of 1991-1993, the amount of federal dollars being spent by the states skyrocketed compared to normal times, an increase that began before any policymaker even knew the economy was in trouble. Under the balanced budget amendment, however, additional federal assistance to states would not be automatic. Rather, it would depend on either a national tax increase, a vote by members in each house to temporarily waive the balanced budget amendment, or cuts in government programs.

Considering the current political climate, cuts would likely be the first option. But from where? Fifty percent of the federal budget remains immune from budget cuts, including Social Security and interest on the debt. This leaves the remaining discretionary portion of the budget, of which about 30 percent presently goes to the states, to absorb the blow. Safety net programs crucial to states, such as Medicare, Medicaid, income support and education, would be among the first to feel the budget ax.

And what would be gained from this fiscal overhaul? Proponents say that mandated balanced budgets would increase the national saving rate and lower interest costs, which in turn would boost rates of investment and economic growth. But while theoretically this might be true, history teaches us that interest rates do not hinge on deficits alone: Interest rates hit a postwar high in the 1970s when the deficit was at a near postwar low; during the 1980s and 1990s the deficit ballooned, yet interest rates have steadily fallen. Because there are many other economic factors at work, the connection between deficits and interest rates is often tenuous, and assumptions of increased investment and economic growth cannot be counted on.

There simply is no compelling reason for a balanced budget amendment. And when the debate turns to adjusting the Constitution, there most certainly should be. Congress is free to work toward balance now, and that is exactly what lawmakers have been doing for the past four years -- without a constitutional amendment, the way it should be done.