Friday, July 29, 2011

Balanced Budget Amendment Silliness

Since the founding of our current constitutional republican democracy, Americans have disagreed heartily over the proper role of the national government in using its fiscal and monetary powers to assure economic growth.  As a nation, we have disagreed over establishment of a national bank, over tight money policy and easy money policy, over the use of tax cuts and spending increases financed by borrowing as an instrument of national fiscal policy.    Throughout all of these debates, honest thoughtful statesmen and economists have disagreed mightily, and at different times in our history, different views have prevailed.   Now, the proponents of the Constitutional amendment seek to win this argument not just for today, but forever, by threatening to destroy our economy unless the rest of us agree permanently to lock their views in the United States Constitution.

Throughout most of our history, the voters have supported parties which believed in using the national government's fiscal powers to promote growth, to invest in infrastructure and development.  The predominant founding party, the party of George Washington, saw the federal government as a great engine of economic development and growth.  The federalists believed that the federal government should use its powers to create infrastructure, and they used the national government to promote economic development.  The party of Jefferson, the democrats, were skeptical of that power, although at times, they used it as aggressively as the Federalists.   The proponents of a constitutional amendment intend to take this national debate over the role of government in promoting economic development out of the hands of the voters and their representatives, and to resolve it for all times.

The proponents don't believe that the great problems of our nation should be resolved by the people:  they want to win the debate for all time.    They believe that they know better than the party of Lincoln, which during the second half of the 19th century used the powers of the federal government to create a great railroad infrastructure.  The Republicans won the civil war using debt to finance the effort, and would not likely have been able to prosecute the nation's defense if a 2/3 vote was required.  The proponents of a constitutional amendment believe that they know better than the party of Roosevelt, which used the federal government's  borrowing power to win World War II and pull our country out of the great depression   They believe that they know better than Ronald Reagen, who used the government's borrowing power to stimulate the economy and to spend the Soviets into the ground with massive defense spending. They think that they understand economics so well that they are willing to insert their position on macro economics into the United States Constitution for all time.

In truth, perhaps proponents are so sure that history may judge them wrong, that they lack the courage to win this argument on the merits.   They threaten instead to destroy the country's economy and its credit unless the rest of us who disagree not only bend to their will, but that we embody their position in the Constitution in the exact language that they propose, so that it will be virtually impossible for the people to change course, if history proves them wrong.  The political party  that is doing this is the same party that, when it came into power ten years ago, immediately cut taxes and vastly increased spending, ballooning the deficit and fighting a war without raising taxes to do it.  This is the party that took the Clinton surplus and converted it to the largest deficit in history.  A balanced budget amendment is silly, because it ties the hands of our democracy permanently and locks us into a position on the role of government that has been a minority position throughout the course of our history. 

A balanced budget amendment  is silly because it won't solve the problem that it is designed to solve.   It is silly, because it will tie the government's hands in times of crisis, and make us less powerful than our adversaries.  It is silly, because most of the greatest funding problems that our government faces are not even addressed by the amendment.  It's silly because it represents an attempt to allow a minority of Americans to dominate decisions of the majority. But it is silly also, because the language of proposed amendments is poorly conceived and poorly written. Let's take a look at the text of one of the popular versions of a balanced budget amendment.  Here is section 1 and section 8:

Section 1. Total outlays for any fiscal year shall not exceed total receipts for that fiscal year.  `Section 8. Total receipts shall include all receipts of the United States except those derived from borrowing. Total outlays shall include all outlays of the United States except those for repayment of debt principal..  

Ok. That seems simple doesn't it.   Let's see if we can figure out how this is gonna work.   The first issue that we have to address is whether the United States is going to be run on the cash basis or the accrual basis, or on the modified accrual basis, or some other accounting basis.   The answer is found in section 7.  Section 7 tells us that "The Congress shall have the power to enforce this article by appropriate legislation."   Now if you are a tea party patriot, I suppose right away, you are going to tell me, banging your fist on the table, that of course we should account for our outlays and our receipts on a  cash basis.  But frankly, a lot of accountants are going to tell us that running the books of any complicated business, and certainly the government, on an accrual basis will actually give you a far more accurate picture of the financial picture.    Running on a cash basis allows for all sorts of manipulation, and as our experience in Minnesota shows, manipulation is the first thing Republicans and Democrats run to when they want to evade an amendment like this.   And, accountants will tell you that you can do a whole lot of manipulation under either system especially if you are allowed to switch back and forth from one accounting method to another.

If you are on the cash basis, you can manipulate things by changing the timing of when taxes are due, for example.  And, you can manipulate things by delaying payment on bills into the next year.   So, if the legislature wants to spend a bit more this year, it can decide to pay all of its December bills in January.   There are all sorts of accounting nightmares presented by this attempt to make a very complicate problem simple

We've not begun to discuss, however, the incentives under this amendment to use "cooperative federalism" to create government obligations that don't count against outlays.   A simple example is special education.   Right now, federal special education requirements mandate state and local expenditures in Minnesota of two billion per year.   Federal and state reimbursement for those mandated expenditures total about 700 million less per year.    The federal government funds only about 20 percent of these mandated expenditures, passing the burden on to the state, and then the state underfunds the remainder, passing the burden on to the local government. Under this amendment, we will see all sorts of hijinks of this kind, pushing unfunded burdens down to local government, so that federal and state legislators can comply with their respective balanced budget amendments.  Medicaid, Medicare, social security, all of these are possible venues for creative cooperative federalism. 

Revenue shifts will become more common like the education revenue shift that Republicans and Democrats jointly introduced in Minnesota.   But still we haven't even scratched the surface. There is nothing in this constitutional amendment that prohibits the federal government from creating entitlements but deferring payment for these entitlements.  Entitlements such as veterans benefits, social security commitments, medicare benefits, all of these benefits are building up future expectations, and the constitutional amendment does nothing directly about this problem.  Instead, it essentially creates a situation where entitlements drive out all other expenditures.

Who is going to resolve issues like this?  The Congress gets to interpret it, according to the amendment.  But if a group of Congressmen disagrees, they can challenge the decision of the majority by taking it to the federal courts, which now become sort of the federal board of debt review.  Section 6 says. "Any Member of Congress shall have standing and a cause of action to seek judicial enforcement of this article, when authorized to do so by a petition signed by one-third of the Members of either House of Congress. No court of the United States or of any State shall order any increase in revenue to enforce this article."  So, the Courts can lower taxes but they cannot eliminate loopholes.  Can they cancel debts if they exceed the ceiling?  Which ones do they cancel?  Who would buy American debt obligations with an amendment  like this in force, anyway, without a significant surcharge for the new risk that a debt instrument is going to be declared illegal by the Constitutional debt court.

Could the courts cancel social security?  If the economy is running at full steam, and one Congress wants to cut taxes because we're running a surplus, can the next Congress restore that tax cut without a 2/3 vote?  Can Congress evade this problem by cutting taxes only for two years, or would a Court adopt the Norquist position and say that at the end of the two year period, its a tax cut?   Can a Congress evade the amendment entirely by voting in a large permanent tax increase by a 2/3 vote and then implementing a temporary tax cut?   Suppose a group of liberals refuses to vote to increase the debt limit in a time of war unless the Constitutional Amendment is repealed? Would that be called economic blackmail?!.  And would the response be, what goes around comes around:  you got the amendment in this way; now we're going to get it out the same way?

Section 4. says that any bill to levy a new tax or increase the rate of any tax shall not become law unless approved by two-thirds of the whole number of each House of Congress by a roll call vote.  What is a new tax?   Can the government substitute a flat tax for the income tax without a 2/3 vote?  Suppose the Congress gives a big tax break to a special interest group (by a majority vote).  Can the next Congress remove that tax break by a majority vote, or does it require a 2/3 vote?   Can we eliminate the interest deduction for home mortgages by a majority vote?  Is that a tax increase or not?    Suppose Congress declares war by a majority vote, but a significant number of Congressmen are opposed to the war.   Can 1/3 of the Senate stop us from funding our troops?  Really?

If the government wants to build a a major hydroelectric system, as for example the Hoover Dam project, does that count against the national debt.  It would not count under a state constitution, because capital budget expenditures that build wealth are not subject to the balanced budget amendment?  Is it really wise to prevent national borrowing for infrastructure projects.? And, when are we going to have a meaningful dialogue about these issues?  How can we have that dialog, when the the amendment is being rammed down our throats by threatening to create a national financial calamity lest we adopt the amendment right now.

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