Stay Away From an Amendment
Politicians talk about the Balanced Budget Amendment as if it were a dose of strong but needed medicine. In fact, it would be economic poison. Most Washington observers expect a bipartisan agreement this year that balances the federal budget by 2002. That's strong medicine. The proposed constitutional amendment is something else again. It would outlaw deficits. Only when three-fifths of both houses of Congress vote to authorize a deficit could one occur. Such a rule would make recessions more frequent and severe.
When the economy turns down, incomes and employment fall. Consequently government revenues (levied primarily on incomes) decline, costs for unemployment insurance rise, and the budget deficit grows. By contrast, when the economy booms, revenues increase and unemployment costs fall - and the deficit shrinks. If the budget must be balanced each year regardless of the health of the economy, deeper budget cuts or larger tax increases will be needed to eliminate the deficit in years the economy is weak.
Today, when the economy declines, the reduced tax collections and increased unemployment benefits automatically start working to bolster consumer spending and brake the economy's slide. If we instead have to cut programs or raise taxes enough to balance the budget when the economy is sputtering, we will be reducing consumer purchases. This is a prescription for tipping a faltering economy into recession, possibly a deep one.
The amendment allows the requirement for budget balance to be waived, but that doesn't solve the problem. The Congressional Budget Office has rarely, if ever, forecast a recession in advance. It will likely prove impossible to amass a three-fifths vote until the economy is already in a recession. This is one reason most economists, including many conservatives such as Fed chairman Alan Greenspan, oppose the amendment.
The amendment also would play havoc with Social Security. The Social Security trust fund is building a surplus that will reach $3 trillion by 2019. As baby boomers retire, this will be drawn down to help pay their benefits. That approach - paying now for part of the benefits they'll receive when they retire - is essential if we are to avoid heavy payroll tax increases on those who will be working when the boomers are older. The amendment would outlaw this sensible approach.
The amendment requires that all government expenditures in any year - including the costs of Social Security benefits - be paid for with taxes collected in the same year. This bars "pre-funding" part of the benefits for baby boomers. Families save and borrow to buy a home or send a child to college; businesses save and borrow to modernize and expand; state and local governments save and borrow to finance road construction and build new schools. Under the amendment, the federal government could neither borrow nor draw on savings to meet future needs.
There's no need for this constraint. Contrary to popular belief, we have a good track record in handling federal deficits. For our nation's first 200 years, we ran large deficits only in wars or recessions. In the early 1980s a large tax cut failed to pay for itself and deficits spiraled. But since 1985, Congress and three administrations have worked to put the deficit genie back into the bottle. The deficit, measured as a percentage of the economy, is at its lowest level since 1974.
A bipartisan agreement to balance the budget by 2002 is within reach. We should seal that agreement and follow with reforms to restore long-term fiscal integrity to Social Security and Medicare. But adopting a constitutional amendment that takes such risks with our economic future is not prudent.
* Robert Greenstein is executive director of the Center for Budget and Policy Priorities in Washington.