Balanced Budget Amendments, Good and Bad

Good intentions often lead to bad results. Unfortunately, Republicans can be just as vulnerable to this trap as Democrats.

An effective Constitutional amendment requiring a supermajority of both houses of Congress to increase the national debt limit is long overdue. Republicans in Congress have proposed a series of well-intentioned Balanced Budget Amendment (BBA) proposals that are meant to achieve this worthy objective. Unfortunately, the existing proposals would result in a fiscal train wreck, would encourage a perpetual state of war, and even then would not prevent the Federal Reserve from doing an end-run around the borrowing limit.

The proposal that has received the most traction in Congress was introduced as House Joint Resolution 2 (HJR2) by Rep. Bob Goodlatte (R-VA) in 2011. It received 62% of the House vote. This was short of the 2/3 requirement to go forward, but still represented strong, bipartisan support. An identical proposal actually passed the House and fell just two votes short in the Senate back in 1995.

This year, a somewhat broader BBA was introduced as Senate Joint Resolution 7 (SJR7) by Sen. John Cornyn (R-TX). It has the backing of 44 Senate Republicans, but has not yet come to a floor vote.

In an op-ed in the New York Times earlier this month, economists Glenn Hubbard and Tim Kane called for certain modifications of the existing plans (“Republicans and Democrats Both Miscalculated,” Aug. 12, 2013).

Despite their good intentions, all three of these proposals would lead to very bad results.

In my article, “An Improved Balanced Budget Amendment” (The Independent Review, Fall 2012), I specifically address HJR2, but SJR7 and the Hubbard-Kane proposal share many of its problems. For convenience, the full text of my “Improved BBA” is inserted at the end of this blog post.

A Constitutional National Debt Limit

The first problem is that all three of these proposals call for the budget to balance each year unless authorized by a supermajority of both houses. However, none provides a mechanism to determine which of the hundreds of appropriation bills leading to a deficit requires the supermajority vote. Will the government just shut down entirely, or will the courts be relied upon to cut spending? Or can the courts actually order tax increases to balance the budget?

My “Improved BBA” solves this problem by making no mention of the annual deficit. Instead it works entirely in terms of a national debt limit that can only be increased by a supermajority of both houses. Existing BBA proposals require supermajorities for both annual deficits and national debt increases. However, the annual budget balances if and only if the debt does not increase. It is therefore redundant to require both. Since a national debt limit is easier to administer and, as detailed below, can provide Congress greater intertemporal flexibility, the BBA should operate entirely in terms of the debt ceiling.

The No Chicken Mechanism

Then, in what I call its “No Chicken Mechanism”, my Improved BBA both empowers and authorizes the President to impound whatever expenses are necessary to stay within the national debt limit. This prevents games of Fiscal Chicken in which both parties threaten to shut down the entire government, eliminates the need for judicial intervention, and places judicial tax increases off the table.

The President actually was understood to have the power to impound unnecessary spending from 1803, when Thomas Jefferson blocked $50,000 for unnecessary gunboats, down until Congress passed the Impoundment Prevention Act of 1974. A Constitutional mandate that explicitly restores this power, and that requires it to be used to stay within the debt limit, is the key to the rational operation of any BBA.

The Bernanke-Blocker Clause

Since 2008 the Bernanke-Yellen Fed has used its emergency powers to purchase 1.3 trillion dollars of non-Treasury securities with new reserve deposits that are convertible on demand into legal tender currency. In what I call its “Bernanke-Blocker Clause,” my Improved BBA defines the outstanding national debt, for the purposes of the BBA limit, to include the net legal tender liabilities of the Fed, net of Treasury securities that would otherwise be included in the national debt.

Without such a clause, any BBA will be completely toothless.

The Lock-In Provision

The Improved BBA also contains an important “Lock-In Provision” that allows the debt ceiling to be reduced to any amount no less than the existing debt by a mere majority vote of both houses. This gives Congress the option to “bank” surpluses in one year against future deficits. It also gives a frugal Congress the option to easily block future Congresses from squandering hard-won surpluses.

National Review senior editor Ramesh Ponnuru (“A Balanced Budget Amendment: Still a Terrible Idea,” Bloomberg.com News, Feb. 18, 2013) rightly points out that requiring a balanced budget in every fiscal year, as in all three of the proposals under discussion, would not give Congress the option to easily bank surpluses in one year against future deficits should the economy turn sour. Chye-Ching Huang and Krista Ruffini (“Proposed Balanced Budget Amendment is Extreme by International Standards,” Center on Budget and Policy Priorities, May 3, 2013) make a similar point. My “Lock-In Provision” answers this important objection, since it does not require the budget to balance in every single year.

Perpetual War for Perpetual Deficits

All the proposals under discussion allow their deficit and/or debt limits to be waived in times of declared war or other national emergency. However appealing though it sounds, such a provision is unnecessary, renders the BBA ineffective, and is actually dangerous to civil liberties.

It is unnecessary, since in any serious war or emergency there would be no problem finding the supermajority necessary to increase the debt limit by an appropriate amount.

It renders the BBA ineffective, since for just a few billion dollars a year in extra aid, any number of tiny but cash-strapped countries would surely be willing to wage perpetual war against the U.S., thereby relieving Congress of any balanced budget restrictions. Perhaps the reader remembers the “Duchy of Grand Fenwick” in Peter Sellers’ 1957 movie, The Mouse That Roared? For just a little extra, Congress could even arrange for an annual crossbow attack on Battery Park, just to prove that the perpetual “State of War” was for real!

And it is actually dangerous to civil liberties, since any budgetary State of War would be an open excuse to curtail freedoms at home.

SJR7

Sen. Cornyn’s SJR7 goes beyond Rep. Goodlatte’s HJR2, by requiring that outlays in any fiscal year not exceed 18 percent of Gross Domestic Product, unless permitted by a supermajority vote of both houses.

While such a limitation on Federal spending as a fraction of GDP might be desirable in principle, putting it in the Constitution again raises the problem of identifying which of hundreds of programs are the ones that require a supermajority vote. As Hubbard and Kane wisely point out, any BBA should be kept on focus by merely “balancing the beast,” and not trying to “starve the beast” at the same time.

Cornyn’s SJR7 would also require a supermajority vote of both houses for any bill that imposes a new tax or raises tax rates on net. While this might also be a good idea, it is an entirely different issue than balancing the budget per se, and so should be made into a separate amendment to be judged on its own merits.

SJR7 also provides that “No court … shall order any increase in revenue to enforce this article.” However, this is merely tacit recognition of the fact that it (like HJR2) has no enforcement mechanism to determine how the budget is to balance, so that the courts will inevitably have to make these hard decisions. With my Improved BBA’s “No-Chicken Clause,” however, this chore is explicitly assigned to the Executive branch, making such a provision completely unnecessary.

Rep. Delatte’s HJR2 postponed implementation of its provisions until 2 years after ratification, but Sen. Cornyn outdoes him by pushing this back until 5 years after ratification. Congress understandably craves one last binge of deficit spending before kicking the bottle of debt accumulation, and incumbent Senators are in a position to party for four more years than Representatives.

However, the best time for a drunk to sober up is always right now. There is no reason the BBA limits should not go into effect immediately upon ratification. My Improved BBA sets the initial debt limit equal to the actual debt on the date of passage. If this is deemed too harsh, it could instead be set, say, 5% above the initial actual debt, in order to give Congress a few months to adjust to the new regime.

The Hubbard and Kane Spending-Side Proposal

Hubbard and Kane recognize the impossibility of precisely balancing current expenditures against current receipts in each fiscal year, since it is not possible to know either receipts or expenditures in real time. They attempt to solve half this problem by instead requiring that current expenses in each fiscal year not exceed the average of realized receipts in the seven preceding fiscal years, barring a supermajority vote or “national emergency.”

While it is true that this would cut an impossible task in half, the remaining half is still nearly impossible, unless Congress cautiously targets a big surplus every year. Even then, there would still be the problem of determining which expenditures are the ones that must be eliminated if the supermajority vote (or willing war partner) for a deficit does not materialize.

A further technical problem with their proposal is that if the real economy typically grows at about 2% per year, and if inflation adds another 2% to nominal growth, a seven-year mean of past revenues will be about 16% less than current revenue on average. As stated, their formula therefore actually mandates substantial surpluses every year, rather than merely balanced budgets. While surpluses to reverse the reckless Bush-Obama deficits might be good policy for the next several years, this should not be written into the Constitution.

A constitutional debt ceiling, with a clear Presidential impoundment mandate, is much simpler to enforce than even the Hubbard-Kane spending-side annual budget-balancing rule.

A Line-Item Veto

One provision that ought to be added to any BBA is an explicit authorization of a Line-Item Veto, in order to enable the President to eliminate frivolous spending before it is even passed into law. I didn’t think of this when I wrote my “Improved BBA” article last year, but I would certainly include it in any future proposal.

The Line-Item Veto Act of 1996 briefly authorized the President to selectively veto individual expenditures in spending bills. Despite strong bipartisan support, it was struck down in 1998 by the Supreme Court on the grounds that it was inconsistent with the Constitution’s Presentment Clause, which details how bills are to be approved or rejected by the President. A BBA would be the perfect place to restore this power.

A line-item veto clause should be carefully drafted by someone more knowledgeable of the mechanics than myself, perhaps taking the Line-Item Veto Act of 1996 and the Supreme Court discussion of it as a starting point.

What Supermajority?

The key to any BBA is the Constitutional provision that only a supermajority of both houses can increase the national debt limit. In my original Improved BBA, I called for a 60% supermajority, since that is what was called for in the most successful Republican BBA to date.

However, if I were starting over today, I would instead call for a 2/3 supermajority. This would be easily obtainable in a real national emergency and would perhaps even make state ratification easier, yet would make deficit spending much harder than a mere 60% supermajority.

Some BBA supporters have called for a 75% or even 90% supermajority. However, such a high figure would likely stand in the way of passage and ratification, and so would be counterproductive, even as a proposal.

Non-Dollar Borrowing, Real Growth, and Implementation (added Aug. 4, 2017)

Ever since World War II, the US has had the luxury of being able to borrow in terms of its own fiat currency, which it is free to inflate at will. In the future, however, there may come a time when US credit and/or inflation is so bad that it is forced to denominate a portion of its debt in a foreign currency or in commodities like gold or silver. Already, approximately 10% of the US coupon debt is indexed to the Consumer Price Index. Any BBA must specify how such debt is to be counted. I have therefore added a clause below requiring that it be evaluated daily at market prices or, in the case of TIPS, at an interpolated value of the index with a lag of no more than three months (as is the current practice).

I have also added a provision that in the absence of any action by Congress to either raise or lower the debt ceiling, it will grow by 1/4% per month (slightly over 3% per year with compounding), in order to keep up with real economic growth.

Also added is an implementation clause, patterned after the wording of the 2017-18 SJR7, introduced by Sens. Mike Lee and Chuck Grassley, and similar in its provisions to Sen. John Cornyn’s 2013 SJR7, discussed above.

My “Improved Balanced Budget Amendment”

For easy reference, the “Improved Balanced Budget Amendment” from my 2012 Independent Review article is presented below. I have added in bold face the five modifications proposed above.

SECTION 1. The outstanding debt of the United States shall not be increased above its level on the date of ratification of this amendment, unless three-fifths two-thirds of the whole number of each House shall provide by law for such an increase by a rollcall vote.

SECTION 2. Should the President determine that expenditures appropriated by law will necessitate borrowing in excess of the limit provided in Section 1 during any fiscal year, he or she shall impound any expenditures as necessary and expedient to remain within said limit. The compensation of members of Congress or of Judges of the supreme and inferior courts may not be reduced under this provision.

SECTION 3. The limit on the outstanding debt of the United States may be reduced at any time to a level no lower than the then outstanding debt by a majority vote of both Houses of Congress by a rollcall vote. In the absence of any action by Congress to either raise or lower the debt limit, the limit shall be increased by one quarter of one percent on the first day of each calendar month.

SECTION 4. Outstanding debt shall include all obligations backed by the full faith and credit of the United States, as well as all legal tender obligations and monetary instruments issued by the United States and its agencies. It does not include contingent claims of the United States and its agencies, and excludes obligations backed by the full faith and credit of the United States held as backing for legal tender obligations and monetary instruments issued by the United States and its agencies. Any debt denominated in foreign currencies, gold, silver, or other commodities shall be evaluated daily in terms of United States dollars at the market prices of the preceding business day. Any debt denominated in terms of a monthly price index shall be evaluated daily in terms of a linear interpolation of the monthly index, using data that is no more than three months old.

SECTION 5. Line-Item Veto provision to be expertly drafted in conformity with Clinton v. New York, 524 US 417 (1998).

SECTION 6. Congress shall have the power to enforce this article by appropriate legislation.