Insight : Balanced-Budget Amendment Would Spell Disaster for Economy

How about amending the Constitution to mandate prayer in the public schools for a balanced budget? That would make about as much sense as the balanced-budget amendment Republicans have promised to make the first order of business in the next Congress.

That amendment is bad law and terrible economics. If it could ever be enforced, it would require--given political realities--some combination of significant cuts in Social Security, shrinkage of the safety net for the poor and sacrifice of programs for investment in our children and our future. More likely, it will suffer the fate of the Prohibition amendment, which was repealed after 13 years of bootlegging and speak-easies.

Most of the public--and, I fear, our politicians--have no understanding of how the federal budget deficit is calculated and what a “balanced budget” would mean. People often say, “I balance my checkbook; why can’t the government balance its?” In fact, by the weird methods of federal accounting, almost all of us would prove guilty of maintaining unbalanced budgets and running deficits. After all, most Americans have gone hugely into debt by buying houses. Many more have borrowed to finance their own or their children’s college education. We properly view spending out of such borrowing as “investment”--in a home in which we can live for decades, or in schooling that will pay off over a lifetime.

Almost all American business borrows, and borrows heavily, to finance investment in new plant and equipment and new technology. But our federal government, unlike private business and state governments and national governments around the world, keeps no separate capital budget. All federal spending--for investment, for paying government workers, for lending to small business, for Social Security, for interest on the debt--generally is lumped together as “outlays.” When outlays exceed tax revenues, we have a “deficit.” It is as if a family made no distinction between spending to buy a house or go to school or invest in a business and gambling away borrowed money in Las Vegas.

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All this--and more--ignored in the various proposals for a balanced budget amendment. One section of one proposal declares: “Total outlays . . . shall not exceed total receipts.” That is like commanding the waves of the Pacific Ocean to cease lapping the shore. What if the waves refuse to obey? Tax receipts go down, automatically, when individual and business incomes go down. Outlays for unemployment insurance go up, automatically, when unemployment rises. That means that even if we somehow could start with a balanced budget, the budget would become unbalanced if the economy slowed, as tax receipts fell and outlays rose. What do we do then? Put the tax collector in jail for violating the Constitution? Or do we raise tax rates and cut unemployment benefits to try to balance the budget? By reducing people’s purchasing power, either of these actions would only slow the economy further.

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The 1995 Clinton deficit is now projected at about $170 billion, little more than half of the $327 billion forecast by the Bush Administration for 1993 just before it left office. In major part, the reduction is coming about because the economy--while it still has plenty of room for improvement--has been getting better. The $170-billion deficit would mean $170 billion in new borrowing, and hence an increase in the federal debt of $170 billion. But that increase--some 5% percent of the $3.5 trillion outstanding--means the debt will be growing less rapidly than the nation’s income. That is well within the guidelines of prudent finance for business or individuals: The debt-to-income ratio would be coming down.

Reducing the deficit further carries grave risks. Balancing the budget, if it were done next year--and note that we could face similar problems whenever an amendment took effect--would take away roughly $170 billion in sales from American business, as our purchasing power would be reduced by that sum. I hope all in the new Congress can calculate how many jobs that would cost.

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But worst of all is the idea of putting this outrageous and perverse economic dogma into the U.S. Constitution. It would plunge courts and accountants and lawyers into perennial battles over how to report the budget. It would invite all kinds of tricks and subterfuges to report a “balance.” Instead of making outlays itself, the federal government could order the states or private business to make them, or could pass regulations requiring individuals themselves to make expenditures. Washington could endlessly refine what is “in” the budget and what is “off-budget”--at least until the next judge caught up with it.

A budget truly “balanced” by current federal accounting procedures would be a disaster for the economy. Given justifiable resistance to large tax increases, it would block us from essential investment spending for public infrastructure, education and research and a successful war against the crime that is destroying our cities and so many of our lives.

And, worst of all, backers of a constitutional amendment would mandate all this and lock it into the basic guarantor of so many of our rights and liberties--the Constitution. It ain’t broke. Don’t try to fix it!