Tag: balanced budget amendment

Should a Balanced Budget Amendment Also Determine the Size of Government?

The House of Representatives are set to debate and vote on introducing a Balanced Budget Amendment to the Constitution of the United States. Such a move is almost certain to fail, as it requires a super-majority in both chambers of Congress, and three-quarters of the states—38 out of 50—would need to ratify it. Coming hot on the heels of the recent spending-cap busting omnibus bill, it’s difficult not to see this as a form of Republican fiscal virtue-signalling.

As I wrote in my recent paper on fiscal rules, the best way to build support for fiscal conservatism is to deliver it. That means constructing an argument about the supply and demand for government, getting public and political buy-in for a new fiscally responsible budgeting framework, and taking the necessary steps to get to a stage where the budget is balanced, ideally though spending cuts. Neither party has shown an appetite for this so far – in fact, quite the opposite.

Rule design is an incredibly important part of acceptance, and then adherence to a rule, too, though: critics and economists have a point about some of the downsides of a pure year-on-year BBA (as proposed). Evidence from around the world suggests rules that are too inflexible to changing circumstances and recessions prove less durable.

Republicans’ St Augustine-like Fiscal Virtue-signalling

The Washington Post reports that “House Republicans are considering a vote on a ‘balanced-budget amendment’” (BBA) to the constitution, having just backed a $1.3 trillion omnibus spending bill which will worsen the deficit considerably.

With deficits now projected to rise as high as 5.3 percent of GDP by 2019, this move amounts to the worst kind of “fiscal virtue signaling” on behalf of the GOP leadership. The vote appears designed to tell voters that the GOP favors fiscal restraint, safe in the knowledge the amendment is near-certain to fail, given the hurdles in the Senate alone and despite all recent evidence to the contrary.

There will therefore be a lot of rightful mocking and dismissiveness from the commentariat on this move. But two points from the conclusions on my recent paper on fiscal rules should be borne in mind.

First, lots of people will use this hook to come out and say a BBA is bad economics, particularly given that overwhelmingly mainstream economists oppose a requirement at the federal level for the books to balance every year.

But countries around the world have developed much more sophisticated fiscal rules which in effect balance budgets over the economic cycle. Switzerland’s is even part of its constitution, and it appears to work pretty well. Fiscal rules really can really help to shape responsible budget outcomes, provided they smooth spending by capping it around trend revenues (rather than requiring balance every year), and avoid scope for overoptimistic assumptions or creative accounting by politicians.

Second and crucially, though, fiscal discipline – even to get to the stage of introducing and abiding by rules – requires political and public buy-in. At the moment, the equilibrium in Washington is instead for higher spending and more borrowing, and a continual reluctance to countenance reform of entitlement programs which drive the dreadful long-term debt projections.

Republicans had the opportunity, after the tax cuts, to explain to voters that if they liked their tax cuts, and wanted to keep their tax cuts, then fiscal restraint over a number of years was necessary. Now, even getting to a stage where a BBA could kick in would likely take years given the high deficit, and the political difficulties of cutting spending.

No doubt there are some Republicans who still care and worry about balancing the books. But with this proposed vote, the GOP instead is preaching like St Augustine: “Lord give me fiscal discipline, but not yet.” The best way of locking in fiscal responsibility is to practice it.

Read my full paper on fiscal rules and the experience of other countries here.

Arizona Moves to Limit Federal Spending

Earlier this month, I wrote about the Compact for America, an elegant mechanism for limiting out-of-control federal spending through a Balanced Budget Amendment to the Constitution that would be advanced via an interstate compact.

Well, already there’s progress on that front.  This past Monday, the CFA passed the Arizona House Committee on Federalism and Fiscal Responsibility.  The full state house will now be taking up this important legislation.

I should note that the prime sponsor of the bill is former Cato intern who’s now a state representative (and my friend), Adam Kwasman.  Glad to see that our internship program is paying dividends with the future leaders of constitutional liberty.

Let’s hope the momentum continues and that the CFA gains traction in other states, putting on Congress to call a constitutional convention or pass its own Balanced Budget Amendment.

House Appropriations Chairman Behind Military Pork

After the Republicans took back control of the House following the November 2010 elections, the GOP leadership went with Kentucky Rep. Hal Rogers—a.k.a. “The Prince of Pork”—to chair the powerful House Appropriations Committee. I wrote at the time that “The support for Rogers from House Republican leaders is a slap in the face of voters who demanded change in Washington.”

I haven’t changed my mind.

A recent article in the New York Times offers up another reminder that the 30-year House veteran’s priority is to funnel taxpayer money back to his district—not downsize the federal government:

In the 1980s, the military had its infamous $800 toilet seat. Today, it has a $17,000 drip pan. Thanks to a powerful Kentucky congressman who has steered tens of millions of federal dollars to his district, the Army has bought about $6.5 million worth of the “leakproof” drip pans in the last three years to catch transmission fluid on Black Hawk helicopters. And it might want more from the Kentucky company that makes the pans, even though a similar pan from another company costs a small fraction of the price: about $2,500…The Kentucky company, Phoenix Products, got the job to produce the pans after Representative Harold Rogers, a Republican who is now the chairman of the House Appropriations Committee, added an earmark to a 2009 spending bill. While the earmark came before restrictions were placed on such provisions for for-profit companies, its outlays have continued for the last three years.

According to the Times, Phoenix Products’ president and his wife have been “frequent contributors” to Rogers’s political committee and the company has spent at least $600k on a DC lobbying firm since 2005. Those efforts apparently haven’t gone unrewarded as Rogers “has directed more than $17 million in work orders for Phoenix Products since 2000.”

Readers should keep this story in mind the next time a Republican member of Congress calls for a Balanced Budget Amendment, complains about the growth in government under Obama, and then argues against “dangerous defense cuts.” The bedtime story that Americans often hear is that the federal government must spend gobs of money on defense in order to “keep us safe from our enemies.” I once believed that story—and then I spent some time in the U.S. Senate watching policymakers treat military spending like any other pot of taxpayer money.

[See here for more on downsizing the Department of Defense.]

Senate Spares Rural Development Subsidies

An amendment to a Senate appropriations bill introduced by Sen. Tom Coburn (R-OK) that would have reduced funding for rural development subsidies at the Department of Agriculture by $1 billion was easily voted down today. Only 13 Republicans voted to cut the program. Thirty-two Republicans joined all Democrats in voting to spare it, including minority leader Mitch McConnell (R-KY), ranking budget committee member Jeff Sessions (R-AL), and tea party favorite Marco Rubio (R-FL).

This was a business-as-usual vote that will receive virtually no media attention. However, it is a vote that symbolizes just how unserious most policymakers are when it comes to making specific spending cuts. That’s to be expected with the Democrats. On the other hand, Republicans generally talk a good game about the need to cut spending and they rarely miss an opportunity to criticize the Obama administration for its reckless profligacy. Republicans instead fall back on their support of a Balanced Budget Amendment and other reforms like biennial budgeting.

I think most Republicans are in favor of a BBA because they believe it gets them off the hook of having to name exactly what they’d cut. There are several reasons why Republican policymakers won’t get specific: 1) they really don’t want to cut spending; 2) they’re afraid of cheesing off special interests and constituents who benefit from government programs; 3) they’re more concerned with being in power and getting reelected; 4) they’re just plain ignorant of, or disinterested in, the particulars of government programs.

As for biennial budgeting, Republicans would have us believe that appropriating money every other year will give policymakers more time to conduct oversight of government programs. I think it’s another cop-out. Coburn’s office put out plenty of information on the problems associated with USDA rural development subsidies (see here). A Cato essay on rural development subsidies provides more information, including findings from the Government Accountability Office that are readily available to policymakers.

(Note: I worked for both Jeff Sessions and Tom Coburn.)

Spending Reform in Rick Perry’s Plan

Texas governor Rick Perry’s “Cut, Balance, and Grow” plan is out. Dan Mitchell discussed Perry’s proposed tax reforms so I’ll offer my take on the proposed spending reforms:

  • Perry says he wants to “preserve Social Security for all generations of Americans” but state and local government employees would be allowed to opt-out of the program. Perry says that younger Americans would be able to “contribute a portion of their earnings” to a personal retirement account. I’d like to be able to completely opt-op without having to work in government. I suspect that other younger Americans who recognize that Social Security is a lousy deal will feel the same.
  • Other proposed reforms to Social Security include raising the retirement age, changing the indexing formula, and ending the practice of using excess Social Security revenues to fund general government activities. Proposing to put an end to “raiding” the Social Security trust fund might be a good sound bite for the campaign trail, but excess Social Security revenues will soon be a thing of the past anyhow. Bizarrely, Perry cites the Highway Trust Fund as “the model for how to protect funds in a pay-as-you-go system from being used for unrelated purposes.” As a Cato essay on federal highway financing explains, only about 60 percent of highway trust fund money is actually spent on highways. The rest is spent on non-highway uses like transit and bicycle paths. The bottom line is that the federal budget’s so-called “trust funds” generally belong in the same category as Santa Claus and the Toothy Fairy. Perry should just stick with calling Social Security a “Ponzi scheme.”
  • As for Medicare, Perry says reform options would include raising the retirement age, adjusting benefits, and giving Medicare recipients more control over how they spend the money they receive from current taxpayers. No surprises there.
  • I’m a little confused by Perry’s language on Medicaid reform. On one hand, he says that the 1996 welfare reform law should be used as the model. The 1996 welfare reform law block granted a fixed amount of federal funds for each state. On the other hand, Perry says “Instead of the federal government confiscating money from states, taking a cut off the top, and then sending the money back out with limited flexibility for how states can actually use it, individual states should control the program’s funding and requirements from the very beginning.” I believe that the states, and not the federal government, should be responsible for funding low-income health care programs (if they choose to offer such programs). However, I don’t think that’s what Perry is actually proposing.
  • Perry calls for a Balanced Budget Amendment to the Constitution and a cap on total federal spending equal to 18 percent of GDP. Federal spending will be about 24 percent of GDP this year. What agencies and programs would Perry cut or eliminate to reduce federal spending by 6 percent of GDP? He doesn’t really say. That leaves me to conclude that he embraces a BBA for the same reason that most Republicans embrace it: he wants to avoid getting specific about what programs he’d cut. One could argue that his entitlement reforms are sufficiently specific, but compared to Ron Paul’s plan, which calls for the elimination of five federal departments, Perry’s plan leaves too much guesswork.
  • Other spending reform proposals don’t make up for the lack of specifics on spending cuts. For example, Perry proposes to eliminate earmarks. That’s already happened. He says he’d cut non-defense discretionary spending by $100 billion, but that’s a relatively small sum and letting military spending off the hook is disappointing. Proposing to “require emergency spending to be spent only on emergencies” sounds nice but would a President Perry stick to it if Congress larded up “emergency” legislation for a natural disaster in Texas or some military adventure abroad?

In sum, there’s some okay stuff here, but I don’t think it’s anything those who desire a truly limited federal government can get excited about. That said, Perry could have done a lot worse.

The Debt Ceiling and the Balanced Budget Amendment

The Washington Post editorializes:

A balanced-budget amendment would deprive policymakers of the flexibility they need to address national security and economic emergencies.

A fair point. Statesmen should have the ability to “address national security and economic emergencies.” But the same day’s paper included this graphic on the growth of the national debt:

National Debt

Does this look like the record of policymakers making sensible decisions, running surpluses in good year and deficits when they have to “address national security and economic emergencies”? Of course not. Once Keynesianism gave policymakers permission to run deficits, they spent with abandon year after year. And that’s why it makes sense to impose rules on them, even rules that leave less flexibility than would be ideal if you had ideal statesmen. Indeed, the debt ceiling itself should be that kind of rule, one that limits the amount of debt policymakers can run up. But it has obviously failed.

We’ve become so used to these stunning, incomprehensible, unfathomable levels of deficits and debt — and to the once-rare concept of trillions of dollars — that we forget how new all this debt is. In 1980, after 190 years of federal spending, the national debt was “only” $1 trillion. Now, just 30 years later, it’s sailing past $14 trillion.

Historian John Steele Gordon points out how unnecessary our situation is:

There have always been two reasons for adding to the national debt. One is to fight wars. The second is to counteract recessions. But while the national debt in 1982 was 35% of GDP, after a quarter century of nearly uninterrupted economic growth and the end of the Cold War the debt-to-GDP ratio has more than doubled.

It is hard to escape the idea that this happened only because Democrats and Republicans alike never said no to any significant interest group. Despite a genuine economic emergency, the stimulus bill is more about dispensing goodies to Democratic interest groups than stimulating the economy. Even Sen. Charles Schumer (D., N.Y.) — no deficit hawk when his party is in the majority — called it “porky.”

Annual federal spending rose by a trillion dollars when Republicans controlled the government from 2001 to 2007. It has risen another trillion during the Bush-Obama response to the financial crisis. So spending every year is now twice what it was when Bill Clinton left office. Republicans and Democrats alike should be able to find wasteful, extravagant, and unnecessary programs to cut back or eliminate. They could find some of them here in this report by Chris Edwards.

In the Kentucky Resolutions, Thomas Jefferson wrote, “In questions of power, then, let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution.” Just so. When it becomes clear that Congress as a body cannot be trusted with the management of the public fisc, then bind them down with the chains of the Constitution, even — or especially — chains that deny them the flexibility they have heretofore abused.