Monday, March 07, 2011

Balanced Budget Amendment: A Disaster In The Making?

With my years of preaching against our constantly escalating federal debt, you would think that this maven would be a big supporter of a balanced budget amendment to the United States Constitution. This should be especially true of a proposal that goes by the name of the Common Sense Balanced Budget Amendment. After all, how can any maven not have at least a modicum of common sense? So you might be a bit surprised to learn that I oppose the proposed balanced budget amendments pending in both the Senate and the House of Representatives.

The House and the Senate versions of the balanced budget amendment differ, but not significantly. H. J. Res. 1 and S. J. Res 3 (112th Cong., 1st Sess.) provide that—

1. total outlays for any fiscal year shall not exceed total receipts for that fiscal year, unless 2/3 of the “duly chosen and sworn” members of each house (Senate) or unless 3/5 of the “whole number” of each house (House) shall authorize otherwise;

2. total outlays for any fiscal year shall not exceed “20 percent of the gross domestic product” of the United States for the calendar year “ending before the beginning of such fiscal year” (Senate) or shall not exceed “one-fifth of economic output of the United States” (House) unless 2/3 of the “duly chosen and sworn” members (Senate) or unless 2/3 of “each House of Congress (House) shall provide otherwise;

3. the limit on the debt of the United States “held by the public” shall not be increased unless 3/5 of the “whole number” of each house shall authorize otherwise (House version only);

4. prior to each fiscal year the president shall submit to the Congress a proposed budget for that fiscal year in which total outlays do not exceed total receipts;

5. a bill to increase “federal taxes” (Senate) or “revenue” (House) shall not become law unless passed by 2/3 of the “duly chosen and sworn members” of each house (Senate) or 3/5 of the “whole number” of each house (House);

6. the Congress may waive the provisions of this article for any fiscal year in which either a declaration of war is in effect or the United States is engaged in military conflict that causes “an imminent and serious” military threat to the national security and is so declared by a joint resolution adopted by a majority of each house;

7. total receipts shall include all receipts of the government except those derived by borrowing; total outlays shall include all outlays of the government except those for repayment of debt principal;

8. the Congress shall enforce and implement this article by appropriate legislation that may rely on estimates of outlays and receipts and on estimates of gross domestic product (House version only);

9. the article shall take effect beginning with the 4th fiscal year beginning after its ratification (Senate) or the later of the 2nd fiscal year beginning after its ratification or the first fiscal year beginning after December 31, 2016 (House).

Simple, isn’t it?

As I read the language of the House and Senate versions of the proposed amendment I became more and more convinced that the authors (Orrin Hatch, Republican from Utah in the Senate; Bob Goodlatte, Republican from the 6th District of Virginia in the House) don’t really understand the complexities of the federal budget process. Or, perhaps they are just depending on some future Congress straightening out the mess through legislation. Or, most likely, they just don’t care because the whole balanced budget thing is just a political ploy.

So, a little lesson for Senator Hatch, Representative Goodlatte and their Republican colleagues:

1- The number one requirement of the Amendment (if passed by the Congress and ratified by the states)—that outlays in any fiscal year not exceed revenues in that same fiscal year--is nearly impossible to achieve. The problem is that all outlays are not the same. First, the larger part of the amount of federal outlays each year comes from direct spending (or entitlement) programs. All of these programs contain a permanent appropriation (“such amounts as are necessary” to carry out the program). This means that outlays from these programs depend on the eligibility requirements of the program, the demographics of the eligible group and the economy. They do not require action by the Congress. For the Congress to control this spending would require it to amend the basic program legislation, a task not politically easy to do.

Second, although both versions of the amendment exempt amounts spent to reduce the amount of the national debt from the definition of outlays, they do not exempt interest payments on the debt. This means that an amount equal to most of the nondefense discretionary side of the budget cannot be affected by the Congress. (When interest rates go up, as they probably will in a post-recession economy, annual interest on the debt will exceed even defense spending). These two bring us to—

Third, the discretionary side of the budget, the side that requires congressional appropriations and thus is practically doable, does not contain enough spending to balance annual outlays and revenue. This is especially true because of another factor that the amendment’s proponents seem not to be aware of. A significant amount of appropriations on the discretionary side of the budget do not result in outlays in the fiscal year for which they are enacted. What do I mean? Well, for salaries and expenses type appropriations, almost all of the amount appropriated will be expended (outlayed) in 12 fairly equal parts during the fiscal year for which appropriated. However, for appropriations that require contracting (all procurement appropriations) amounts may be expended for several years after the fiscal year for which the appropriation was enacted. In fact, for much defense contracting the process of awarding the contract may take more than a year. This means that the budget effect of the appropriations for these programs extends over several years. To control the outlays in these programs, the Congress would have to cut appropriations years before they might contribute to a deficit. Is the Congress prescient?

2. The second major requirement of the proposed amendment is that total annual outlays not exceed 20% (1/5) of the gross domestic product (or economic output) of the United States. This requirement will also be exceedingly difficult to achieve for the same reasons I just mentioned for the balanced outlays and revenue requirement. The Congress just has very little control over outlays in any given year.

3. The proposed amendment requires supermajorities (2/3 in the Senate, 3/5 in the House) to increase taxes. This nearly guarantees that a balance of outlays and revenues cannot be achieved. It deprives a majority of the members of each house of the Congress of the ability to increase government revenues as a method to achieve the requirement of section 1 of the amendment. That means that the annual budget will have to be balanced solely by cutting outlays. And, as I just finished explaining, that will be well nigh impossible.

4. Both the House and Senate versions have delay provisions. In the Senate, the amendment would not become effective until the fourth year after ratification. In the House, it would not become effective until the second year after ratification (or 2016 if ratification is swift). Presumably, this delay period would give the Congress some time to plan and enact implementing legislation. But, would it provide sufficient time for the Congress and the president to make the cuts required to meet the requirement of section 1 of the amendment?

The recently elected Republican majority in the House of Representatives promised to reduce spending by $100 million in the current fiscal year. Events since they took office in January have made it clear that this was an a lot easier promise to make than to accomplish. For most of the reasons I already talked about there just isn’t that much outlay reduction that the Congress can accomplish during a fiscal year. The House Republicans may have to settle for half the cuts they promised. Now, I think that is a great accomplishment and clearly a step in the right direction. However, it is not anywhere near meeting the balanced outlay and revenue requirement of the amendment.

The real problem is that there is no way of bringing outlays and revenue into balance without increasing federal taxes. It was cutting taxes that created our deficit problems in the first place (see at least a half-dozen things I have written in the last four years). By requiring politically that all budget balancing will have to be done on the outlay reduction side, the amendment invites disastrous results. Where can you find a trillion and a half dollars to cut?

The solution to bringing the budget to balance (and then beginning the mammoth task of paying off the debt) does not lie in an amendment to the Constitution. Rather, it lies in the president and the members of the Congress having the courage to do what is necessary both in cutting expenditures and in increasing revenues. The members of the president’s bipartisan commission (and others) have come up with many proposals for attacking our budget problem. All of these proposals require members of the Congress and the president to make unpopular decisions. Will they? Or are they only interested in getting reelected?

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