In 1798, Thomas Jefferson wrote to a friend that the one thing missing from the newly minted Constitution was some kind of limit on federal debt:
I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the genuine principles of its Constitution; I mean an additional article, taking from the federal government the power of borrowing.
Now that Washington has kicked the can on our out-of-control spending yet again, isn’t it time to reconsider Jefferson’s wish?
It may be easier than previously thought, through an ingenious spin on the balanced budget amendment (BBA). Compact for America, a Texas-based nonprofit advised by the Goldwater Institute’s Nick Dranias, is advancing an agreement among the states — called an “interstate compact” — to transform the constitutional amendment process into a “turn-key” operation. That is, a single interstate compact can consolidate all the state action involved in the Article V process: the application to Congress for an amendment convention, delegate appointments and instructions, selection of the convention location and rules, and ultimate ratification. It then consolidates all the corresponding congressional action, both the call for the convention and ratification referral, into a single omnibus concurrent resolution.
The secret to combining so much in just two overarching pieces of legislation is the use of contingent effective dates — also known as “conditional enactments” or “tie-barring” — to ensure that each piece of legislation only goes “live” at the right time. The Compact for America is thus designed to cut the time and resources needed for states to originate and ratify a BBA, making it possible to achieve in the next six months, with a symbolic target date of July 4, 2013.
This creative new vehicle for constitutional reform would require a majority of state legislatures to approve any increase above an initial debt limit. In other words, 26 state legislatures would be required to co-sign on the federal government’s credit card.
But unlike the current and continuous brinkmanship spurred by the statutory debt limit, the Compact for America is designed to force Washington to prepare a budget that makes the case for more debt long before the midnight hour arrives. It requires the president to start designating impoundments (akin to “sequesters”) when spending exceeds 98% of the debt limit. It then requires Congress to override those impoundments within 30 days with alternative cuts if it disagrees. By forcing both the executive and legislative branches to show their cards long in advance of the constitutional debt limit, this compact-turned-BBA would ensure that no game of chicken holds the country hostage.
But that’s not all: Recognizing that our debt problem is primarily a spending problem, the proposed amendment would also require a two-thirds vote of both houses of Congress for any general tax increase. Excluded from this high hurdle, however, would be proposals to eliminate deductions, credits, and exemptions, as well as the replacement of our income tax with a sales tax (which I personally wouldn’t do without first repealing the Sixteenth Amendment power to levy an income tax, lest we be stuck with both kinds). The proposed amendment would thereby ensure that any new tax burden assumed to pay down the debt would almost certainly make our tax code flatter, fairer, and far more conducive to economic growth — which is the best way to prevent both debt spending and tax increases in the long run.
By trading the possibility of new tax revenues for a constitutional debt limit and pro-growth structural tax reform, the Compact for America could permanently and structurally bridge future fiscal cliffs with a principled compromise that's been poll-tested to get at least 38 states on board.
The Compact for America BBA, in addition to fiscal soundness, allows for great flexibility when necessary: If a majority of state legislatures can be convinced that the federal government should borrow more money, the BBA allows for the federal government to finance truly justifiable wars and address genuine crises without easily exploited loopholes.
State legislatures will thus have a voice in whether new federal debt is incurred, for the same reason that the Constitution originally gave states a voice in the Senate: a distant centralized authority shouldn’t have a free hand in determining the future of every community in the nation. Indeed, the contemplated state debt approval process is more modest than the Constitution’s original design (before the Seventeenth Amendment provided for the direct election of senators). Instead of state control over half of the entire federal legislative power, the Compact for America targets state authority on the specific problem of unsustainable federal spending. It empowers the states only in direct proportion to Washington's addiction to debt financing. If Washington kicks its debt habit, then the states will no longer have the power to intervene directly in the federal budget.
Moreover — and bear with me as I get into some technical economic weeds — among BBA proposals from the past couple of decades, only the Compact for America enables Keynesians, Monetarists, and Austrians to unite. That’s because, when ratified, the Compact’s BBA will set a hard constitutional debt limit that will erode in real value if inflation continues and state legislatures wisely throttle back congressional requests for more debt authority. Thus even Keynesians would support the kind of monetary stability long desired by Monetarists and Austrians in order to preserve flexibility in fiscal policy, without making ideological pre-judgments on what the budget should be spent on.
Only by working together to preserve the value of the dollar would Keynesians be certain to retain what amounts to a large revolving line of credit that could be paid down with surpluses during good times and tapped for stimulus spending during bad times. At the same time, because of the fiscal discipline imposed by a hard debt limit and external oversight of any request for future expansion of the limit, Keynesians would greatly minimize the risk of their good intentions being abused by Washington debt addicts seeking short term political gain — which is a huge risk under the status quo of federal borrowing “to infinity and beyond.”
While no proposal satisfies all constituencies -- simply capping spending growth at GDP growth would be cleaner, for example -- no other BBA idea holds the promise of creating a constitutional structure that will enable disparate schools of economic theory to find principled common ground on monetary policy.
With the states serving as an active board of directors for our wayward federal executive and legislative "CEOs" and the buck stopping at the president’s desk, the Compact for America would powerfully check and balance Washington’s debt addicts. For more information, watch the overview briefing and read the model legislation.