Wednesday, August 3, 2011

Balanced Budget Amendments Are a Bad Idea. All of Them.

I'm not sure how serious Matt Yglesias was with his suggestion of a Progressive Balanced Budget Amendment, and I'm sure that Democratic Senators working on their own BBA should probably name that one the CYA BBA. Nevertheless, I have to point out: there is no such thing as a good Balanced Budget Amendment. This has nothing at all to do with my personal opposition to balanced budgets, and everything to do with the nature of the budgets and the nature of the US Constitution. To review:

The problem is enforcement.

On the one hand, the whole notion of forcing the government to balance its budget is actually, in practice, impossible to implement. That's because much of what the government spends, and even more of what it takes in, are impossible to "budget" in any kind of exact way before the fact. That's because, under the way things are currently done, all we have at the beginning of a fiscal year are estimates of how fixed law will react with various economic and other facts to produce spending and revenue. Given that the best you can do at the beginning of the year are estimates, a BBA has two choices. It can require the budget to be balanced going into the fiscal year, but if it does that it will only encourage Congress and the president to use phony estimates (which aren't hard to do -- really, all you need are economic rosy scenarios). Or, you can require that the budget be balanced after the fact. But that's extremely difficult. Suppose revenues run short because the economy underperformed. Is the government going to demand highway funds that were paid out months ago? Have seniors mail back their Social Security checks? Impose a retroactive surtax? Really? It just doesn't work.

Now, the even worse part. How does this thing get enforced, anyway? The obvious answer is: through the courts. That's obviously a terrible idea; the courts shouldn't be involved in regular government budgeting at all, really, and they certainly shouldn't be doing the budgeting themselves. But how else do such things get enforced? Presumably, if any BBA passes the next thing that happens are appeals to the courts to get definitions of "budget," "balance," and everything else tossed in there.

It's just a terrible, terrible, awful idea.

The way to balance the budget is to balance the budget. When Congress and the president supported that goal in the 1990s, they did it. If they don't want to, a BBA isn't going to force them to. It would only create a big mess.


  1. God that would be horrible. That would mean... anyone who has been harmed by an unbalanced budget would then have standing to sue the US government? What a mess.

  2. It's just a terrible, terrible, awful idea.

    I was thinking one would never pass, until you said that.

    Now I know it's a mortal lock.

  3. Lots of states require balanced budgets, by their constitutions or otherwise.

    Do they actually get balanced budgets? And if so, why do you think a federal amendment would be so much less workable?

  4. States are made more able to balance their budgets in a downturn because of, inter alia, federal stabilizers (UI after 20 or 26 weeks, Medicaid) funded by federal deficit spending.

  5. @acrossthestreet ; basically, no. they just run up more debt.

    I am thinking more and more the answer is to remove budgeting authority from congress. It has become a monster. Let's go back to the 1921 act.

  6. Even if we had a balanced budget amendment, practically I would guess that it will have as much effect at the 14 amendment does on raising the debt limit (i.e. not at all).

    Politically I think this is a good idea for Dems. Currently it seems the GOP gets a free pass on actually balancing the budget because they can point to their support for a balance budget amendment. If the GOP opposes it, then the average voter sees the GOP and Dems balanced budget amendments as another pointless political ploy and the GOP advantage will be nullified. If the GOP supports it then the Washington Establishment will have to take the idea seriously, rather than just giving the GOP plan a pass.

    On a related note, why does entitlement reform by the Washington Press Establishment always focus on raising the age at which Medicare cuts in? Wouldn’t allowing Medicare to negotiate on Pharmaceuticals the way that Canadian Medicare does would control costs much better, but no one seems to consider that as entitlement reform.


  7. How do states do it (or try to do it), apart from relying on the federal government to go into deficit to help them? In New York, they traditionally balance the budget by borrowing money to cover their obligations. (Okay, so it's an idiosyncratic definition of balanced.) In Mississippi a couple of years back, they did it by shutting down the schools before the school year was over, suggesting that balancing the budget is possible if it's your only priority. And has anyone noticed that the GOP solutions for the federal budget problems (tax caps, supermajorities for tax increases, etc.) are precisely the things that bankrupted California?

  8. @acrossthestreet--
    Most state constitutions (all of them, actually, so far as I know) that require balanced budgets require that the prospective budget as passed be in a pro forma state of balance. (And in some states, even with balanced-budget requirements, no one even pays much attention to that--I refer here primarily to Illinois). So the requirement is not an actual balanced budget, but just a planned balanced budget.

  9. And state governments sell bonds to pay for infrastructure and other capital improvements, so they do carry debt from year to year.

  10. I'm not sure I should offer this, seeing as my position on a balanced budget is not TOO far from our esteemed host's, but here goes:

    In theory, couldn't you balance the budget by using savings? Fund year 1 entirely on bonds at the start. In year 2, the spending cap is the amount of revenue from year 1. And so on.

    Naturally, the "dig a deep hole to start" aspect of it is very unappealing. As is the fact that Congress is making decisions based on old realities, at least for levels (Congress can prioritize the spending based on whatever's in their heads at the second of the votes).

    I'm opposed to the basic enterprise of the whole thing, but as a theoretical exercise, would that work?

  11. Having a balanced budget is really quite simple. At the beginning of a reporting period, you count up all your forecasted revenues, all of your forecasted expenses, subtract from latter from the former, and if its >=0, voila, you've got a balanced budget! The CBO can be a big help in this process.

    The argument about enforcement misses the point entirely; indeed, it confuses budgets, which are inherently forecasts, with actual results, which aren't. Every budget, whether of the humblest family or the largest corporation, will have variance when actual data comes in. Expecting that a balanced budget amendment will fail because there will inevitably be variance is to misunderstand the reasons organizations have budgets.

    The great benefit of a balanced budget is this: if the US enters every reporting period with a CBO forecast that revenues=expenses, it would be pretty unusual for the variance to be more than about 1 or 2%, which is arguably the most the economy can tolerate on a going basis. If you want your variances to stay within an acceptable range, forcing the math to add, in the budgetary process, is a great way to do it.

    And its not hard. Seriously. The CBO has lots and lots of smart people, they can quite easily add forecasted costs and forecasted revenues to ascertain whether a budget is balanced or not. Indeed, to the extent that we all (mostly) trust the CBO to say that the next 10-years-budgets are imbalanced to the tune of $1.2 T/year, why in the world would we worry about them doing the math on a balanced budget and saying, yup, this guy's balanced?

  12. Of course, if you do succeed in balancing the budget, it's going to be a drag on the economy in every recession.

  13. Also, why do Congress/the President have to own the assumptions that go into building the budget? Wouldn't the CBO be an independent voice to provide those assumptions, reasonably objectively?

    Even if one felt the pernicious influence of Congressional/Presidential lobbying would trump internal controls and cause the CBO to become biased, there's still a pretty simple solution: coming clean on variances periodically during the year.

    Many institutions do this. The idea is to collect variances periodically, say quarterly, and flush them out to develop an adjusted budget, noting how far it is from the original, and making adjustments to get back to the baseline. This is actually not that different from what the Super Congress is supposed to do this fall.

    Really. Its not that hard. Its just that no politicians are motivated to do it, which ought to make the citizenry a wee bit nervous.

  14. I find this topic frustrating, because it incorporates sacred liberal canards, which are less obnoxious than conservative ones, but possibly no less dangerous to the country. One such canard is: Washington will balance the budget when it wants to, such as when that All-Time Great President Clinton did so in his second term. And if Washingtonians don't want to, that is, if they're not as great as Clinton, they won't.

    Linked at the end is a series of historical tables from the Office of Management and Budget. The first link has government revenues and expenses for the past 200+ years. The four years of balanced budgets are 1998-2001. Note the following:

    Average Receipts, 1994-1997: $1.41 Trillion
    Average Receipts, 1998-2001: $1.89 Trillion
    Difference: 34%

    Now perhaps Clinton's liberal greatness caused a 34% jump in revenues in the back half of his Presidency. An alternative view: its been said that the tech stock market bubble bursting cost investors $5 Trillion. What happened while that $5 Trillion bubble was built? Shares changed hands, frantically, meaning that - probably - a huge majority of that $5 Trillion was taxed at short-term rates due to less than 1 year holding periods.

    $5 Trillion * 0.34% = $1.7 Trillion, spread over the four years in question would be roughly $0.42 Trillion, or pretty close to the gap between Clinton miracle years revenue and the years immediately prior.

    So short of a historic stock market bubble (or, er, Clinton's historic Presidential superawesomeness), there's no evidence that Washington has ever, left to its own devices, shown an inclination to come close to balancing the budget. Uhh...can we really afford to just wait around for, you know, another awesome Clinton-type? (*coughs nervously*)

  15. Sorry - here's the link:

  16. Sorry to be late to this conversation, but I notice some have asked about the experience of the States with BBA's. My coauthors and I just wrote a paper on this exact topic which provides some answers. Brad Plumer at the Washington Post did a blog entry on the research yesterday:

    The paper is also available here:

  17. I agree with CSH about the possibility of a balanced forecast, but disagree that it should be applied on budgets. From what I understand, Yglesias is advocating for a Constitutional Pay-Go amendment. That means that every bill has to be projected to be deficit neutral on a ten year horizon. That's a "balanced budget" amendment, but it wouldn't be pro-cyclical.

    Most importantly, it would get rid of the gap between current law and current policy. Its a big problem that "deficit hawks" will advocate for trillion dollar extensions of the bush tax cuts, or billions for the doc fix and AMT patch, right before they fight tooth and claw to save 20 billion during the appropriations process.

  18. Just getting to this, but...

    CSH --

    Right now, CBO is basically trustworthy because it's in the institutional interests of Congress for it to be honest. But there's no guarantee that it would stay honest; we've had times when OMB's numbers were honest, and times when they weren't.

    It seems to me that if there's a major incentive for Congress to want CBO to cheat, then they'll set it up so that CBO will cheat.

  19. Reduce all Federal spending 10% and increase all revenue 10%, across the board, no exceptions! Cut 10% Expenses – Raise 10% Revenues. Everyone in the Country is affected by this crises. Everyone should share in the solution, no exceptions.
    All Government agencies receive a 10% funding cut. Let the individual agencies to figure out how to do it, leave the politicians out of it. Yes some entitlements may have to be reduced by up to 10%.
    If you paid $20,000 in taxes last year, you would pay $22,000 in taxes next year. It sucks but we can go on with our heads in the sand.
    More will need to be done than this 10/10 proposal but this program will get us half the way there to solving our National deficit by this time next year!


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