5 Reasons Why a Balanced Budget Amendment is a Very Bad Idea

Since the talks on the debt ceiling have hit an impasse, Republicans have turned their attention to a particularly destructive way to score some cheap political points. They have proposed solving our current debt problems by putting a “Balanced Budget Amendment” (BBA) in the Constitution which would require (according to the bill proposed on March 31) :

  • Every budget passed by Congress to have expenses less than the revenues for that year
  • Total outlays to be less than 18 percent of the country’s GDP
  • No tax increases
  • The above provisions may only be overruled by a 2/3 vote of both houses of Congress
  • The debt limit can only be raised by a vote of 3/5 of Congress
  • If the US is engaged in a military conflict, 3/5 of Congress can vote to deficit spend on funds for the war.

Though at first glance it may have some appeal, this amendment would be disastrous for the US economy and would further cripple the already weak and dysfunctional US government. Why? Here’s why:

1. It would cause an “Economic Death Spiral” every time the US enters a recession.

Simply explained, when a recession occurs in the United States, spending in the private sector contracts. Businesses fire people and cut  back on production. People who have been laid off spend much less than they would normally at their businesses of choice, causing those merchants to cut back on their workforce and the goods and materials that they purchase. Rinse and repeat. As you can see, there are ripple effects throughout the economy whenever there is a downturn. Economic downturns persist because of a lack of demand and are solved when people have money to spend again.

That’s where the government comes in. The government helps stabilize the economy in a recession in many ways:

  • While there is a cascade of firings rippling through the private sector, the government keeps people employed because it doesn’t have to fire off all its workers when the economy takes a nosedive. It can deficit spend to cover its employees’ salaries. This keeps more people out of the pool of the unemployed and keeps people in productive jobs, earning a salary, buying goods and paying taxes.
  • The government provides a social safety net for those who have temporarily fallen on hard times. It gives the unemployed access to Medicaid so their health doesn’t suffer simply because  they have lost their job. This also helps to keep recessions from affecting the health care industry, insulating one industry from a downturn. The government provides unemployment payments to people who are between jobs. This helps the economy because unemployed people receiving payments are very likely to spend them to stimulate the economy while unemployed people without access to any money don’t stimulate the economy at all. Its also a basic, caring, human service to give those who are in-between jobs (through no fault of their own) a little money to tide them over until the job market gets better.
  • The government often temporarily lowers taxes during a recession to put more money in the pockets of American consumers and businesses. If they have more money, people are more likely to use it stimulate the economy during a down period, when it needs it most.

The government does all these things by deficit spending, by engaging in a practice that would be banned under a BBA. But that’s not all a BBA would do. A Balanced Budget Amendment would require the government to actually cut back the services it provides at the time the economy (and real people) needs them most. During recessions, people and businesses make less and spend less money, so there is less money that can be taxed. Tax revenues fall sharply in recessions. Since 2007, tax receipts have dropped 20% (and keep in mind the budget wasn’t balanced in 2007).

To keep a balanced budget going during a recession, the government would actually cut its spending at the time the economy needs it most. That means that under a BBA, the government would have to fire people when the private sector does. This means that even more people would be competing for jobs that wouldn’t be there. Since unemployed people don’t have money to buy things or pay taxes (especially if they aren’t getting unemployment benefits), tax revenue would fall further, necessitating  further cuts, which would cause  further government layoffs and more cuts to Medicaid, which would make the unemployment situation worse and decrease tax revenue… (see  how it starts spiraling down?)

With a BBA, the government would actually have to cut unemployment benefits and Medicaid during a recession, exactly when people rely on them most. Would it make any sense for the government to get rid of or severely reduce unemployment benefits and Medicaid right when a lot of people become unemployed and uninsured? The BBA would force us to do that and that makes no sense by any moral or economic rationale.

2. It would destroy Medicare, Medicaid, and Social Security

The BBA caps government spending at 18% of the country’s GDP (basically, at 18% of the yearly economy). One of the many, many problems with that is that we have a rapidly aging population and rapidly rising health care costs. I dont know if you’ve heard, but the Baby Boomers will be retiring soon and when they do, our government will be spending a lot on their Social Security checks and medical care. As well it should, I might add. Baby Boomers have paid into these programs, and like everyone else, they deserve to get what they paid for. If the BBA passes, they will not get what they paid for.

According to the Congressional Budget  Office, (page 7) spending on Medicare, Medicaid, the Children’s Health Insurance Program and insurance subsidies for the working and middle class will take up 10% of GDP by themselves in 2035 and Social Security will take up another 6% of GDP by then. Interest on the debt is assumed to be about 4% of GDP in 2035, military spending will be 4% of GDP (assuming it doesn’t rise at all as a % of GDP between now and 2035) and everything else the government does will probably be about 8% of GDP. Add it all together and by 2035 the government’s responsibilities will account for 32% of GDP (assuming no rise in any programs except Medicare/Medicaid/Social Security). Under a BBA, 44% of what the government is expected to do would have to be cut away. How would we do this? No one has offered a plan to get spending down to this very low level.

(Update: It was just pointed  out that the amendment caps spending at 18% of the previous year’s  GDP, and since the GDP grows almost every year, this amounts to an average effective spending cap of 16.7%, not 18%. So, by 2035, we would have to cut 48% of everything I have outlined above)

In short, it is ridiculous to try to keep government spending below 18% of GDP. Government spending has averaged over 18% of GDP for the past 40 years. Cutting spending to that low level from now on means trashing the social safety net for our elderly right as the Baby Boomers retire and people need that safety net most.

3. The US is unique because of our ability to borrow money, so why would we handcuff our government with a balanced budget amendment?

The US special in many ways. One of the ways it is very unique is because the US dollar is the reserve currency of the world. People want to buy and hold dollars because  they are backed by the strength of the US economy. Because everyone wants our dollars, we are able to borrow money very cheaply. In fact, we are  able to borrow more money more cheaply than really anywhere else in the world. Even though we have a massive and growing debt, we can borrow money (deficit spend) at an amazingly low cost to the US taxpayer. This is a strength of the US. We have more flexibility in spending and taxing than any other country does because  we can deficit spend almost for free. Enacting this balanced budget amendment would put a handcuff on the US economy and the US government that no other country has.

4. A balanced Budget Amendment would not have prevented any of the bad things that are going on in our economy right now.

The debt of the US government is not now hurting the economy at all. That’s a fact. Currently, interest payments are low, as are interest rates in the economy. A BBA would in no way help our current situation and would actually make it worse (reason #1). In fact, we would still have a fairly large deficit if we had passed a BBA in 2000. That’s because it is much easier to deficit spend on wars than on anything else  under this BBA. So, when George Bush launched  his two wars in 2001 and 2003, they would have likely been exempt from the BBA. I’m betting that the subsequent expansion of Homeland Security and intelligence services as well as the doubling of the Dept of defense’s budget would also have been exempted from the need for a balanced budget. So, we would still have incurred an additional debt of $2 trillion since 2000, even if the BBA had been in place. But instead of that increased spending going toward things that help Americans (like Medicare) it would have been going toward things that are used to fight for and against foreigners (the military).

5. It would let only Republican legislative priorities pass through Congress

Lets continue down that road and pretend that the BBA was passed in 2000. The way its worded now, it would allow initiatives that Republicans like to pass through Congress, but not ones that Democrats like. Consider this hypothetical:

When Pres. Bush was elected, one of his biggest priorities was passing huge  tax cuts for the rich. These were enormously expensive though, so under the BBA, Bush had to find some way to pay for those tax cuts. Maybe he would have paid for them by privatizing Social Security (which he actually did try to do). All that could be accomplished by a majority vote in Congress. 51% of Congress+the President’s signature.

Now say Barack Obama was elected 8 years later and wanted to give everyone in America access to healthcare. To make sure  the budget stays balanced, he would pay for this by raising taxes on tanning salons and on the rich. Only one problem: to raise taxes of any kind, you need the approval of 2/3 of Congress, which is virtually impossible to get on any major legislation these days.

Huge tax cuts and a demolition of one of the most important programs in our government could be accomplished by a simple majority of Congress while raising taxes by one penny on one person in America would need the approval of both parties in Congress, a virtual impossibility. Amendments to the Constitution should not favor any one faction or interest, yet this proposed amendment obviously does.

For so, so many reasons, this Balanced Budget Amendment is a very bad idea.

(updated on Aug 11. Recalculated government spending slightly and condensed reason #1)

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