Committee Of Correspondence

The Balanced-Budget Amendment

Robert Shapiro
7:45 a.m.  Wednesday  12/11/96

       AN APPEAL FOR A SENSE OF PROPORTION – AND ROMANCE        The record does not support the claim that Americans suffer from “an inescapable bias” to spend more than they are prepared to pay for. For most of our history, Washington has run significant deficits only in wartime and recessions; otherwise, the federal books generally showed a modest surplus or a deficit of trivial size. However, the last 15 years have been different. We not only opted for guns and butter–large increases in defense, at least initially, and entitlement spending–but topped it off with a dessert of tax cuts. Few economists thought it made sense, but it was what President Reagan and Congress wanted, and a majority of Americans were agreeable.
       This is evidence not of an inescapable bias toward dangerous deficit spending, but merely of a susceptibility to temporary enthusiasms that do not always serve our long-term interest. And, like sensible people, we recovered our moorings. First, we cut back on dessert: Congress raised corporate, payroll, and excise taxes in 1982, 1983, 1984, and 1986, and corporate, personal, and excise taxes in 1990 and 1993. Next came fiscal gun control: Defense spending stopped rising by the mid-1980s and began to decline in real terms in the 1990s. Last, Congress is trying low-fat substitutes for butter. Non-entitlement domestic spending began to shrink in the 1980s. AFDC is on an austerity budget. Medicaid spending is rising much more slowly. And President Clinton and congressional Republicans both have proposed substantial Medicare reforms.
       Rather than a corruption of spirit that requires a strict new constitutional rule, these budgetary habits seem more like the normal human tendency to infatuation–and responding with the BBA would be like recommending celibacy to everyone who’s ever been disappointed by romance.
       Anyway, we can still take measures to protect ourselves from unhealthy infatuations in the future–without becoming shut-ins. Two important elements are already law: Caps on non-entitlement spending, and the requirement that any new tax cut or entitlement expansion be financed by comparable tax increases or entitlement cuts. Perhaps the final piece could be some form of new cap on the future growth rate of entitlement spending. But let’s keep such rules in the law and out of the Constitution, so we’re not forced to slam on the brakes whenever the economy begins to skid–and so that when the need is great, the American people can still follow their hearts. Jim Miller
1:29 p.m.  Wednesday  12/11/96

       WEDNESDAY MUSINGS ON THE GREAT BBA DEBATE        Of course! Moderator Herb Stein is right. The opponents of the BBA do have valid points.
       Perhaps the most important is that the BBA would lead to serious efforts by Congress and the president to get around its strictures. Likely, we would get more unfunded liabilities and more regulation (another reason to adopt a “regulatory budget”).
       Bob Reischauer knows well the problem of estimating federal revenues and outlays with any kind of precision. As he says, the deficit (or surplus) is typically the small difference between two large numbers. Obviously, under the BBA, Congress and the president are in more difficulty if there is a surplus than if there is a deficit. Rather than target on the surplus side each year, Congress and the president should establish and rely on a “rainy day fund” that would carry over from one year to the next–dipped into when there’s a (small) deficit, and replenished when there’s a (small) surplus.
       Reischauer’s point about the complexity of legislation implementing a BBA is also well taken. The BBA will not be simple to apply nor airtight in its strictures. But then again, few public institutions are perfect.
       Rob Shapiro’s point about capital vs. cash budgets is also important. But as I indicated in yesterday’s comments, the problem is the way a capital budget would be implemented.
       On Shapiro’s point in today’s comments about “inescapable bias” toward deficits, an uninterrupted string of deficits since 1969 (the sole exception since 1960) can hardly be characterized as reflecting a “temporary enthusiasm.” Indeed, as Shapiro notes, for most of our history we seldom ran deficits except in time of war and recessions. But after running deficits, we tended to run surpluses to pay off the debt–which is not the case now. Moreover, since the 1930s, budget balance (or surplus) has been more the exception than the rule. Perhaps, as Jim Buchanan has argued, it has to do with the acceptance by so many of deficits as a consequence of “enlightened” macroeconomic policy (à la Keynes); perhaps it has to do with the overall size of government (i.e., beyond some threshold, the stakeholders in government programs gain the upper hand and overcome opposition by promising to rely on borrowing, not taxes); or perhaps it merely reflects a cultural shift. In any event, despite lots of rhetoric by politicians, deficits are “in,” not “out,” and to offset this, we need the discipline of a BBA.
       Finally, in response to Herb Stein’s provocative question about how things might have been different if the BBA had been in effect in 1980, how’s this? During the decade, (a) outlays for debt service would have been much lower, (b) the run-up in entitlement spending would have been attenuated considerably, (c) we would have spent a little less, and more wisely, on defense, (d) the recession would have been less severe, (e) the initial tax cut would have been phased in over a longer period, and (f) during the recession, both houses of Congress would have voted the two-thirds necessary to run a modest deficit. (Tomorrow I give advice on picking stocks.) Sen. Paul Simon
1:51 p.m.  Wednesday  12/11/96

       OBSERVATIONS ON THE COMMENTS OF OTHERS        Jim Miller said there should be a tax-limitation provision. There is. The proposal requires a majority recorded vote of those elected to increase taxes. Generally, that has been the case with tax increases, but occasionally they have been slipped through with a carefully calculated voice vote by only a few members on the floor. The proposal to require a two-thirds or three-fifths vote for passage would make government response to real needs sometimes unachievable. It is too severe a restraint, and should not be enshrined in the Constitution.
       As to Bob Reischauer’s observation that we “should examine how a BBA would be implemented before we approve such an amount,” that is an invitation to get enmeshed in unpopular details before the principal is established. We know that it will take a combination of spending cuts, CPI adjustments, and possibly some revenue increases–changes that are small compared to those that many nations have made to get their houses in good financial shape. Helping balance the budget will be the reduction in interest that will save the federal government large sums of money but will also stimulate the economy, bringing in more revenue.
       In response to Herb Stein, I do not believe in incorporating a slight surplus into the Constitution, but I do favor doing it legislatively. Will that be easily achieved? No. But the groups that now clamor for more spending–like for the cause of education, which I strongly support–will have to also ask for revenue or other means of achieving laudable goals. It is too easy to be irresponsible now.
       If the BBA had been in effect in 1980–Herb’s question–we would now have a deficit of less than $1 trillion rather than more than $5 trillion; we would have much lower interest rates, a stronger economy, and, if the Concord Coalition study is accurate, the average U.S. family would today have approximately $15,500 a year more in income. Not bad.
       And we would not be drifting toward where we are now headed: monetizing our debt. Robert Reischauer
2:38 p.m.  Wednesday  12/11/96

       NO NEED TO PANIC, THE BIAS IS MANAGEABLE        Jim Miller is right. There is little question that there is a bias built into our system that favors spending now and taxing tomorrow, or maybe never. Politicians can claim credit today for the largess they deliver with a new or expanded program ,and are able to evade or diffuse responsibility for the resultant deficits that may arise in the future. Moreover, in our system, it is easier to stop something from happening than to take action. Therefore, when entitlement spending begins to explode because of unexpected demographic developments, weakness in the economy, or rapid health-care inflation, for example, it is very difficult to get the political system to take corrective actions.
       Faced with this situation, the relevant questions for the BBA debate are “How serious is this bias?” and “Are there steps short of adopting a BBA that might correct the situation?” Looking over the span of the last 40 years, any sensible observer would have to conclude that the bias is not very great. While spending as a share of GDP grew from 18 percent in the last half of the 1950s to 22.6 percent in the first half of the 1990s, 2.4 percentage points of this increase were attributable to the federal government’s wildly popular decision to take on a new responsibility, namely providing health insurance for the elderly and disabled through Medicare. Another 2.7 percentage points of the growth reflected the increase in Social Security spending. In other words, the federal government’s non-Medicare, non-Social Security spending declined relative to the size of the economy. That’s hardly a picture of wild bias.
       Moreover, with much kicking and screaming, the political system has shown some recent ability to impose a bit of discipline upon itself without resorting to a BBA. Between 1989 and 1996, two years in which the economy was operating at pretty much its full capacity, total federal spending as a percent of GDP fell from 21.3 percent to 20.6 percent. While that’s not a huge drop, it does provide a glimmer of hope that the system can take corrective actions without amending the Constitution.
       The moderator asked what would have happened in the early 1980s if a BBA had been in effect. Most likely, we would have seen a combination of responses. The tax cut of 1981 would not have been as large, and the Reagan defense buildup would have been more modest. But with the deep recession of 1981-1982, there still would have been a substantial deficit. With the unemployment rate hovering just below 10 percent in 1982 and 1983, Congress would have mustered the supermajority needed to approve unbalanced budgets. Finally, crafty legislators would have worked overtime to develop mechanisms for evading the amendment’s discipline. Herb Stein
3:06 p.m.  Wednesday  12/11/96

       It seems to me that much of the problem with the BBA is connected with its insistence on balancing the budget every year. Does anyone really care about balancing the budget every year? Dwight Eisenhower, a sensible man who considered himself a fiscal conservative in his time, said that he was in favor of balancing the budget, but he saw no reason to balance it in the time it takes the earth to go around the sun.
       The requirement of annual balance may be both too restrictive and too permissive. It complicates the problem of adapting the budget to fluctuations in the economy and to inevitable errors in budget forecasting. At the same time, it allows the government, while staying within the confines of a balanced budget for the current year, to make commitments for future expenditure increases or tax cuts that will create huge fiscal difficulties when the future rolls around. We have already experienced this problem.
       Consideration of fiscal policy, both in the government and outside, has now moved beyond concentration on the annual budget. More and more attention is being paid to at least the five-year plan. Would it be feasible to change the amendment to give it a longer-term look, meeting the main objectives of the proponents of the BBA and somewhat meeting the objections of the opponents?
       Following up on that thought, is there some ground between the amendment and the kind of changes in congressional procedure that Shapiro talks about where the two sides could meet?
       Does anyone here worry about the Sam Peltzman effect? Probably Miller is the only one who knows what that is. Peltzman is the University of Chicago economist who proved that requiring motorists to wear seat belts increased highway fatalities, because once they had the belts on, the drivers felt more secure and drove more recklessly, causing more accidents. Is it possible that discussion of the BBA diverts attention from discussion of the budget decisions we have to make, and that enactment of the BBA would relieve decision-makers of the feeling of a need to make responsible decisions?