Balanced Budget Amendment is a really bad idea!!!

The idea of changing the Constitution to require a balanced budget seems like a good idea right? It appears to force lawmakers to live within their means. How could that be a bad thing? Well, how is it that most U.S. states now requires a balanced budget from the governor and/or the legislature, Yet still find themselves in various types of financial messes?

At the state and local level it creates an incentive to create all sort of off-budget enterprises like housing authorities and hospital authorities, to avoid the implications of the balanced-budget amendment. Also a balanced-budget amendment would mandate action to counter recessions and economic downturns not to mention tax revenue shortfalls and unemployment benefits. This would essentially hard wire Keynesian Economics into the United States Constitution.

Below is the contents of a letter written to our leaders in Washington in regards to the idea of balanced budget amendment. The letter is written by 6 past Nobel Prize Economists and Laura Tyson from the University of California, Berkeley.


We, the undersigned economists, urge the rejection of proposals to add a balanced-budget amendment to the U.S. Constitution. While the nation faces significant fiscal problems that need to be addressed through measures that start to take effect after the economy is strong enough to absorb them, writing a requirement into the Constitution that the budget be balanced each year would represent very unsound policy. Adding additional restrictions, as some balanced budget amendment proposals would do, such as an arbitrary cap on total federal expenditures, would make the balanced budget amendment even worse.

1. A balanced budget amendment would mandate perverse actions in the face of recessions. In economic downturns, tax revenues fall and some outlays, such as unemployment benefits, rise. These so-called built-in stabilizers increase the deficit but limit declines of after-tax income and purchasing power. To keep the budget balanced every year would aggravate recessions.

2. Unlike many state constitutions, which permit borrowing to finance capital expenditures, the federal budget makes no distinction between capital investments and current outlays. Private businesses and households borrow all the time to finance capital spending. A balanced budget amendment would prevent federal borrowing to finance expenditures for
infrastructure, education, research and development, environmental protection, and other investment vital to the nation's future well being.

3. A balanced budget amendment would invite Congress to enact unfunded mandates,
requiring states, localities, and private businesses to do what it cannot finance itself. It also invites dubious accounting maneuvers (such as selling more public lands and other assets and counting the proceeds as deficit-reducing revenues), and other budgetary gimmicks. Disputes on the meaning of budget balance would likely end up in the courts, resulting in judge-made economic policy. So would disputes about how to balance an unbalanced budget when Congress lacks the votes to inflict painful cuts.

4. Balanced budget amendment proposals typically contain escape hatches, but in peacetime they require super-majorities of each House to adopt an unbalanced budget or to raise the debt limit. These provisions are recipes for gridlock.

5. An overall spending cap, which is part of some proposed amendments, would further limit Congress’s ability to fight recessions through either the built-in automatic stabilizers or deliberate changes in fiscal policy. Even during expansions, a binding spending cap could harm economic growth because increases in high-return investments — even those fully paid for with additional revenue — would be deemed unconstitutional if not offset by other spending reductions. A binding spending cap also would mean that emergency spending (for example on natural disasters) would necessitate reductions elsewhere, leading to
increased volatility in the funding for non-emergency programs.

6. A Constitutional amendment is not needed to balance the budget. The budget not only attained balance, but actually recorded surpluses and reduced debt, for four consecutive years after Congress enacted budget plans in the 1990s that reduced spending growth and raised revenues. This was done under the existing Constitution, and it can be done again. No other major nation hobbles its economy with a balanced-budget mandate. There is no need to put the nation in an economic straitjacket. Let the President and Congress make fiscal policies in response to national needs and priorities as the authors of our Constitution wisely provided.

7. It is dangerous to try to balance the budget too quickly in today’s economy. The large spending cuts and/or tax increases that would be needed to do so would greatly damage an already-weak recovery.

You can see the complete letter here. 

Update 7-25-2011

It has come to my attention that the use of this letter (From my previous post on 7-20) might not be having the effect I planned.  I hoped that using material from a left leaning source would help show the commonality between our points of view.   As I wrote this I assumed that most readers would understand the natural aversion to changing the Constitution that any Constitutionalists would have.  I understood that many of the economists who wrote this letter lean to the left, I figured it would show both sides of the argument which agree, but what I failed to calculate was the mass support such an amendment would have.  If your reading my blog you probably lean to the right and should realize I do as well.  I'd like to believe you don't support a balanced budget amendment just because some leftist economists disagree with the idea.  I don't make a habit of supporting something just because the left is against it. There are many reasons why I hold the view I do, some of the reasons coincide with the views of these economists and some do not.

I personally believe in a free market economic system which takes controls away the Federal Government.  This means in my personal view anything that puts more control on the economy is a bad idea.  Murry Rothbard once wrote, "balancing the budget by increasing taxes is like curing influenza by shooting the patient."  A balanced budget amendment would allow the Federal Government to use tax hikes to do just that.  He also agreed with one of my earlier points.  He believed a major flaw was treating "the budget" as a constitutional entity which would increase the tendency of the government to spend money on off book items that don't get included in official expenses.  There are all kinds of games that can be played depending on how such an amendment is written.  Do we really want to take the chance right now with the current climate?  My last aversion but certainly not least in my mind is the fact that spending is our problem. 

WE DON'T NEED A CONSTITUTIONAL AMENDMENT TO CUT SPENDING! 

Why people can't understand this is beyond me.   

Cheers,

Mike