The U.S. ought to maintain the ability to run a deficit during economic stress, so long as it makes concrete plans to eliminate that deficit in future years
As part of the much-anticipated debt ceiling deal struck Sunday, Republicans' demand for a vote on a balanced budget amendment has succeeded. We'll see one occur sometime this year. This might just be a politically motivated move to hold a vote that Republicans know will fail but provides them a great talking point come election season: "We want the government to balance its checkbook, while Democrats rejected this basic, sensible idea." From an economic perspective, however, a strict balanced budget amendment isn't particularly sensible. But if tweaked, it could be.
The Danger of a Strict Balanced Budget Amendment
We can't be sure precisely what a balanced budget amendment will look like. The obvious central idea is to end the culture of deficit spending in Washington. That's a good idea in theory, but if too strict it could make the economy worse off.
Balanced budget rules often allow exceptions in time of emergency, where a supermajority could overrule the amendment. For example, if some nation declared war on the U.S., then Congress could vote to suspend the balanced budget rule and spend additional money on defense. Perhaps a financial crisis could also qualify for relaxing the rule.
But as the past few months have shown us, even attaining a regular majority for a bill in both houses of Congress is no easy task. Unless an issue is so utterly uncontroversial that almost no one, despite differing political ideologies, opposes it, a supermajority will be very hard to attain. As a result, the U.S. would likely be forced to keep its budget balanced unless a sort of once-in-a-generation event strikes.
Looking back at a couple of recent important votes, you can begin to see how difficult a supermajority would be to attain. If we're talking about a three-fifths supermajority, the financial bailout of 2008 would have only passed by three votes in the House. The 2009 Obama stimulus, however, would have failed by 12 votes in the House. If we're talking about a two-thirds majority, then both would have failed -- the extension of the Bush tax cuts in late 2010 would have failed as well. In other words, the most significant steps taken to dampen the effect of the financial crisis and recession that followed would have failed or barely passed.
If you're one of those people who is convinced that government job cuts during a recession are a good thing, then you probably don't much mind the strictness of balanced budget amendment. But those in this boat also probably love tax cuts, which could also be just as hard to pass as a stimulus measure.
A Cyclical Balanced Budget Amendment
Of course, you also don't want a balanced budget amendment that's too easy to alter, because then what's the point? If Congress can just ignore the amendment whenever it wishes, then there's no reason to bother with creating the amendment at all. So a balanced budget amendment should be developed that allows a deficit to accumulate during times of economic stress, but then disposes of it once the economic returns to normal.
Why not write that into the amendment? For example, the balanced budget amendment could be conditional. It would apply at all times, unless the unemployment rate is above 7% or has increased by 0.5% over the past six months.
If a deficit occurs to combat unemployment under such a scenario, whether by spending or tax cuts, then it must be reversed once the unemployment rate has been steady or declining for six months and shrinks to 6%. At that time, a 5-year plan to pay off the recently-created deficit would automatically go into effect.
The trick is making sure that the deficit actually does get paid off, which can be accomplished by the amendment containing an automatic mechanism. When a bill puts deficit-inducing spending or tax cuts are put in place, it must also include a plan to eliminate that deficit over the 5-year period that will ensue once the economy recovers. If a bill doesn't contain both components, then the deficit spending will be forbidden. But only a majority -- not a supermajority -- would be required to pass such a bill.
When policy becomes too inflexible, it can do more harm than good. But as the accumulation of excessive national debt over the past few decades have taught us, when policy isn't strict enough it can also do a great deal of harm. Congress should seek to keep the U.S. on a sustainable budgetary path, but it shouldn't risk the nation's economic stability by doing so. A sensible balanced budget amendment should be sought that's flexible, but not too flexible.
Image Credit: REUTERS/Jason Reed