The Case for New Fiscal Rules

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A proposed budget that would increase the federal debt or taxesshould be approved by a broader consensus of Congress than thatrequired for routine legislation. That is the sum and substance ofthe balanced budget/tax limitation amendment now beforeCongress.

Consistent with the letter and spirit of the Constitution, theproposed amendment defines the rules by which the major fiscaldecisions would be made, not the outcomes of these decisions. Theproposed amendment would not constitutionalize fiscal policy. The"automatic fiscal stabilizer" would still be effective;stronger-than-expected economic conditions would lead to a budgetsurplus, weaker-than-expected conditions to a budget deficit. Theamendment would require broader support for an increase in debt ortaxes but would not require a balanced budget or prohibit a taxincrease. The primary purpose and effect of the proposed amendmentwould be to assure that a decision to expand the fiscal powers ofthe federal government reflects a broader support of Congress thanthat required for routine legislation.

The Case for New Fiscal Rules

For the first 140 years of U.S. history, the federal budget waseffectively constrained by two fiscal rules: the formal limits inthe Constitution on the enumerated spending powers and an informalrule that the government could borrow only during recessions andwars. At the end of the 1920s, federal expenditures were 2.6percent of GDP, most of which was for the military and the deferredcosts of prior wars. And the characteristic budget surplus duringpeacetime recovery years constrained the federal debt to 16 percentof GDP. The constraints on federal spending and borrowing alsocontributed to the conditions that led to a roughly stable generalprice level over that long period.

Over the past six decades, however, federal expenditures haveincreased to about 23 percent of GDP, most of which is for newforms of services and transfer payments. Larger and more frequentbudget deficits (continuous since 1969) have increased the federaldebt held by the public to an amount about 50 percent of GDP. Andthe general price level is now about 10 times the level at thebeginning of this period. This dramatic change in fiscal andmonetary conditions in my lifetime occurred without one amendmentto the Constitution that would authorize a change in the fiscalrules. Our effective constitution has been transformed into one inwhich Congress and the president may authorize any type or amountof expenditures and taxes, subject only to the voting rule forroutine legislation.

The appropriate response to this erosion of the substantivelimits on federal fiscal powers is to approve more constrainingvoting rules on decisions affecting the budget totals. One shouldreject out of hand the argument that such rules are inherentlyinconsistent with democratic government.

All of us are willing to delegate many decisions within afamily, firm, and other voluntary organizations to realize thebenefits of comparative advantage and the reduction ofdecisionmaking costs. For this same reason, many nations havechosen a representative government with a majority voting rule.Such delegations, however, are almost always subject tosubstantive, quantitative, or procedural constraints on the groupto which the decisions are delegated. Moreover, there is animportant relation between the voting rule and the several types ofconstraints: the lower the voting rule, the more important are theconstraints on the authorized powers of the organization.

For governments, the realistic alternatives are to authorize anarrow range of powers and a majority voting rule or a broaderrange of powers and a supermajority rule. The design of the U.S.Constitution was to limit federal expenditures to the enumeratedpowers defined in Article 1, Section 8, with the amount of suchexpenditures to be determined by the normal voting rules forappropriations. There is a reasonable case that such substantivelimits may be preferable to a supermajority rule on the budgettotals. Such substantive limits, for example, permit a federalpolitician to respond to constituent pleas by saying, "I would liketo help you, but the Constitution does not authorize Congress tofinance this service." But that genie is already out of the bottle.Most of the current activities of the federal government have noconstitutional basis in the enumerated powers, and there is noprospect of a constitutional consensus on the original substantivelimits or on some new set of substantive limits.

The case for a new fiscal rule affecting the authority of thefederal government to borrow is based on three observations. First,the current pattern of federal expenditures and receipts is notsustainable. Second, it is preferable to stabilize the ratio of thefederal debt (or interest payments) to GDP sooner than later, atlevels of this ratio closer to the present level than at a higherlevel; net interest payments, already the third largest componentof federal expenditures, are also among the most rapidly growingcomponents. Third, Congress has demonstrated no ability to binditself or a subsequent Congress to a sustainable borrowingrule.

The absence of obvious near-term adverse effects of the federaldeficit, however, has contributed to the erosion of the politicaldiscipline necessary to enforce a sustainable fiscal policy; ifsome adverse effects had been more apparent, the normal politicalincentives of Congress would probably have been sufficient toreduce the growth of the federal debt. The primary problem offederal borrowing is a moral problem: we are passing an increasingpart of the cost of current government services to ourchildren--without their consent. Federal net interest payments arenow about $2,000 per taxpayer; each new generation of voters andtaxpayers would clearly prefer that less borrowing had beenauthorized in prior years. The case for a new constitutional ruleon the authority to increase the federal debt is to protect ourchildren from our own lack of fiscal discipline.

Finally, the U.S. Constitution requires a supermajority toapprove several measures. Congress has established a supermajorityrule for several other types of measures, now including proposalsto reduce taxes. Almost all of the states have some form of specialrule on the issue of new debt. Many of the states require asupermajority of the legislature or a referendum to increase taxes.Majority rule has instrumental value--it is the minimum voting rulethat avoids inconsistent decisions on the same vote--but it doesnot have normative value in and of itself. There is ample precedentand a strong case for requiring a higher voting rule on moreimportant decisions like the overall levels of public debt andtaxes.

Some Remaining Issues

Two remaining issues must be resolved to assure approval andratification of an effective amendment:

The Senate version of the proposed amendment, which authorizesan increase in taxes by a majority of the members of each house,does not provide an adequate barrier against increased taxes. Thisincreases the prospect that the budget would be balanced by highertaxes rather than a slower growth of spending, weakens thepotential economic benefits of the amendment, and reduces theprospects for ratification.

Neither version protects state and local governments from anincrease in unfunded mandates. Congress plans to vote on a statutethat provides such protection before the vote on the proposedconstitutional amendment, but statutory protection that may laterbe changed may not be sufficient to assure ratification of theamendment.

Congress is now rushing to vote on these issues by the end ofnext week. If it takes more time to resolve the above issues,Congress should delay the vote. There has never been a betteropportunity to restore a responsible fiscal constitution. Do itright. Seize the day!