Once again Congress is taking up the issue of a balanced-budget amendment to the Constitution. Legislators have voted on similar amendments five times since 1982 and each time the amendment has gone down in defeat. And for good reason. While the arguments in favor of the amendment strike many appealing chords, they simply do not add up to good economic policy
Proponents of a balanced-budget amendment argue that the national debt resulting from deficit spending is an abomination that dampens economic activity and crowds out private investment. They cite a need to restore “fiscal responsibility” to an out-of-control Congress, arguing that a constitutional amendment is the only way to force legislators to make difficult budgetary decisions. In addition, proponents claim that the federal government’s deficit spending is unique among American governments, households and businesses. They must all balance their budgets, the argument goes, so why not the federal government? Topping off the list is the moral argument: Is it right to expect future generations of Americans to pay for the spending of the current generation?
None of these arguments withstands objective scrutiny. Research by the late economist Hyman Minsky, for example, found that a lack of government debt could lead to the collapse of the U.S. banking and monetary system. In the case of the savings and loan debacle of the 1980s, the financial structure was protected only because the federal government was able to go into debt to assure that the liabilities of our depository institutions would not fall below full value. Safe, secure government debt is an important asset that stabilizes our financial system and overall economy. In addition, research has cast doubt on the often-cited theory that government debt substantially crowds out private sector borrowing.
The argument that American households and businesses must balance their budgets simply does not hold true. Debt is a vital instrument for financing investment and capital development in the private sector. Businesses incur debt to fund expansion and train new employees and so do all American households that buy a car, a home or take out a college loan. Were it not for the ability to take on debt, many businesses would never expand or take creative risks, and many Americans would be unable to obtain an education that provides new opportunity for increased wages or to gain entrepreneurial skills to start new businesses.
The argument that state and local governments must balance their budgets is also not entirely accurate. State and local governments do run deficits, but they have found creative ways to hide them. They have capital budgets for financing long-term investments outside of their operating budgets, for example. The federal government has no capital budget, so all federal expenditures, whether consumed entirely in the year they are purchased or over several years, are recorded in the same way.
Former New York Comptroller Edward V. Regan has cited several gimmicks used by states to “balance” their budgets. They include: accelerating revenues, such as tax collections, while delaying payments; shifting the financing of government functions to off-budget accounts; borrowing repeatedly against the same assets; selling assets under lease-back schemes; deferring maintenance and infrastructure costs; and reducing pension contributions. Rather than promoting fiscal responsibility, a balanced-budget amendment is more likely to encourage new levels of fiscal irresponsibility as the federal government adopts similar schemes of apparent balance.
And what about the moral argument that through deficit spending we are running up a huge national debt that will bankrupt our children’s future? One could just as easily argue that through deficit spending we are laying the foundations for our children’s future economic prosperity. It was past deficit spending that pulled the nation through the Depression, war and natural disasters and that built the post-World War II economic prosperity we are now enjoying. Is it not equally important that our children inherit a society that affords them job opportunities, quality schools, a clean environment, safe streets and a rising standard of living?
History has shown that there are times when deficit spending is necessary to lift the economy out of recession or to overcome a natural disaster. While the most recent version of a balanced-budget amendment, introduced by Rep. Bill Archer (R-Texas), would allow Congress to “unbalance” the budget in time of need, doing so would require a two-thirds vote of both the House and Senate. This is hardly in keeping with our beloved principal of majority rule. The will of the majority could be undermined by 34 senators or one-third of House members. If one thinks back to the difficulty of achieving a simple majority in last year’s budget debate, which featured a government shutdown and market-rattling threats of default, the likelihood of mustering two-thirds support in both chambers, even in times of national crisis, seems slim.
Just how dangerous is deficit spending? The current federal budget deficit is about 2 percent of the gross domestic product–far less than many other industrialized nations and far below what it was 40 to 50 years ago. In the late 1940s and early 1950s, the nation undertook a broad public investment initiative that caused the debt-to-GDP ratio to balloon to 129 percent. Not only did this investment lay the cornerstone for stable economic growth and prosperity for the next half century, the debt-to-GDP ratio was reduced to its current low level within that time.
The potential damage to the U.S. economy–and therefore to the well-being of Americans–from a balanced-budget amendment to the Constitution could be far greater than the perceived dangers of deficit spending. If we truly believe our government is fiscally irresponsible, we must not delude ourselves into believing that a constitutionally forced balanced budget will solve this problem. A far better solution would be to educate the public about the true relationships among federal spending, economic stability and investment in the future. Given the facts, the public will force its elected representatives toward the only real answer: end wasteful, unproductive spending.
