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Department of Political Science
University of Rochester
A balanced budget refers to the situation in which government revenues equal government outlays, where there is no budget deficit. During the history of this nation, the Government had been successful in balancing the federal budget most of the time, except in times of wars or recessions. However, ever since the Second World War, the Government has balanced its budgets only eight times, most recently in 1969. Especially during the 1980's, the federal deficit rose to unprecedented levels. See the chart below:
Source: Evens 1997:210
These budget deficits have prompted political campaigns to propose an amendment to the United States constitution requiring the Government to balance the budget. Polls showed that the balanced budget amendment was one of the most popular amendment proposals, supported by 83 percent of Americans two years ago (Leo 1996:30).
In this paper I will discuss this proposed constitutional amendment to balance the budget. In the first part I will present a review of the proposals for a constitutional amendment to balance the federal budget, and their results in the Congress. The second part is a detailed review of the arguments and predictions made by proponents and opponents of this amendment, including their normative goals and the mechanisms assumed by both sides. In part III I discussed the applications of existing political science researches that have been made on balancing the budget, especially on the relevance of the states' balanced budget constitutional amendments. The fourth part concludes.
Congress had been arguing over the amendment off and on since the founding of the nation, and Government policies and national attitudes toward annual deficits and national debt were ambivalent from the start and have remained so ever since. Jefferson proposed balanced-budget amendment; when he was elected president in 1800 and took control of fiscal policy, he reversed the course of Hamilton, the nation抯 first Treasury secretary who borrowed more money after the Revolution. Jefferson attempted to balance the budget and paid down the national debt during all eight years he held office. Despite his earlier rhetoric, though, Jefferson did not press Congress for a balanced-budget amendment. Later, President Jackson made the United States debt free by shifting spending to the states, but the economy, wobbling on a precarious structure of state-bank credit, finally collapsed in the Panic of 1837. This led virtually all of the states to rewrite their constitutions in the 1840's to impose balanced budget requirements on themselves. The modern history of the Congress?debate on the proposal went back to the 1930's, when a Minnesota Republican congressman introduced a version in the depths of the Depression on the theory that forcing the government to cut spending and raise taxes would somehow pull the economy out of its awful slump. Proponents still ascribed vast, almost magical fiscal properties to the amendment, but its primary virtue in the late twentieth century was political. President Reagan turned to the amendment as political cover when his own policies began to create enormous deficits in the early 1980s, and Republicans and conservative Democrats had clamored for it even as they proposed and supported wildly unbalanced budgets. Ever since 1982, the House had passed it every few years, and so had the Senate, but never in the same year. See the chart below:
|1982||August 4||passed (69-31)||October 1||rejected (236-187)|
|1986||March 25||rejected (66-34)|
|1990||July 11||rejected (270-150)|
|1992||June 9||rejected (280-153)|
|1994||March 1||rejected (63-37)||March 17||rejected (271-153)|
|1995||March 2||rejected (65-35)||January 26||passed (300-132)|
|1996||June 6||rejected (64-35)|
|1997||March 4||rejected (66-34)|
The 1996 joint resolution proposed a constitutional amendment to balance the budget by the year 2002 or two years after ratification by three-fourths of the states, whichever is later. Three-fifths of the entire House and Senate would be required to approve deficit spending or an increase in the public debt limit. A simple majority could waive the requirement in times of war or in the face of a serious military threat. The most recent proposals of the balanced-budget amendment have two versions in the Congress during the debate. One of them would include in the amendment a provision requiring three-fifths majorities in each chamber to pass future tax increases. This "tax limitation" provision had been included in the House Republicans?"Contract with America". Another version of the amendment proposal, drafted principally by conservative Democrat Charles W. Stenholm of Texas and cosponsored by Republican Dan Schaefer of Colorado, would have required that a three-fifths majority have to vote to approve budgets that project deficit spending. The amendment proposal presented to the Senate is the Stenholm version, but also included a provision that the courts would be prohibited from raising taxes or cutting spending unless specifically authorized by Congress. The actual text of the latest version of the balanced budget amendment to the constitution is as follows:
105th CONGRESS, 1st Session, January 28, 1997
S. J. RES. 12: Proposing a balanced budget constitutional amendment in the Senate of the United States.
Mr. DORGAN (for himself, Mr. DASCHLE, Mr. REID, Mrs. FEINSTEIN, Mr. FORD, Mr. HOLLINGS, and Mr. WYDEN) introduced the following joint resolution; which was read twice and referred to the Committee on the Judiciary
Proposing a balanced budget constitutional amendment.
Resolved by the Senate and House of Representatives of the United States of America in Congress assembled (two-thirds of each House concurring therein), That the following article is proposed as an amendment to the Constitution of the United States, which shall be valid to all intents and purposes as part of the Constitution when ratified by the legislatures of three-fourths of the several States within seven years after the date of its submission to the States for ratification:
`SECTION 1. Total outlays for any fiscal year shall not exceed total receipts for that fiscal year, unless three-fifths of the whole number of each House of Congress shall provide by law for a specific excess of outlays over receipts by a rollcall vote.
`SECTION 2. The limit on the debt of the United States held by the public shall not be increased, unless three-fifths of the whole number of each House shall provide by law for such an increase by a rollcall vote.
`SECTION 3. Prior to each fiscal year, the President shall transmit to the Congress a proposed budget for the United States Government for that fiscal year in which total outlays do not exceed total receipts.
`SECTION 4. No bill to increase revenue shall become law unless approved by a majority of the whole number of each House by a rollcall vote.
`SECTION 5. The Congress may waive the provisions of this article for any fiscal year in which a declaration of war is in effect. The provisions of this article may be waived for any fiscal year in which the United States is engaged in military conflict which causes an imminent and serious military threat to national security and is so declared by a joint resolution, adopted by a majority of the whole number of each House, which becomes law.
`SECTION 6. The Congress shall enforce and implement this article by appropriate legislation, which may rely on estimates of outlays and receipts.
`SECTION 7. Total receipts shall include all receipts of the United States Government except those derived from borrowing. Total outlays shall include all outlays of the United States Government except for those for repayment of debt principal. The receipts (including attributable interest) and outlays of the Federal Old-Age and Survivors Insurance and the Federal Disability Insurance Trust Funds (as and if modified to preserve the solvency of the Funds) used to provide old age, survivors, and disabilities benefits shall not be counted as receipts or outlays for purposes of this article.
`SECTION 8. This article shall take effect beginning with fiscal year 2002 or with the second fiscal year beginning after its ratification, whichever is later.'.
1. Normative goals
On the problem of the balanced budget amendment, the focus of contentions between proponents and opponents does not lie in the question "why a balanced budget?", but in the question "why a constitutional amendment?". Even the most stubborn critics of the amendment would agree that strong actions be taken to reduce the long-term deficit. The normative goals of the proponents and opponents alike are fiscal responsibility: long-term economic benefits will flow from putting the fiscal house in order, and eliminating the deficit will help put the nation back on the path to lasting prosperity and a rising standard of living for the future generations. Two economists in the Data Resources Incorporated modeled the economy from 1966 to 1980 to analyze the effects of a balanced budget, and they concluded that "[t]he benefits of budget balancing are important", which "include better economic performance both in terms of real growth and inflation"(Eckstein and Probyn 1981:12). But the proponents and opponents disagree on how to achieve this goal, and on the mechanisms and predictions about achieving it.
2. Mechanisms assumed by proponents and opponents
First, proponents of the balanced-budget amendment argue that politicians of both parties lack the will power to balance the budget unless it is mandated through the constitution. They maintain that even a law requiring balanced budget is not enough. In American history, several such laws have been tried without success. They have been either ignored or systematically undermined. The limit on the public debt, enacted at $7.5 billion in 1917, was supposed to cap the addition of more annual deficits to the national debt. However, whenever deficit spending pushed the debt up against the limit, Congress eventually passed another law setting a higher debt limit, protesting all the while. This has been done more than 80 times (64 times since 1960) and the debt limit now stands at $5.5 trillion in March 1996. The Congressional Budget and Impoundment Control Act of 1974 was used principally to ratify deficits -- not to prevent them. Actually a Republican Representative said, "I will be here when this alleged reform goes into operation, but I predict members of this House ... will quickly find ways to warp and bend the reform rules laid here today .... This legislation is another resort to gimmickry"(U.S. Congress 1974:H5200). Another example is the Balanced Budget and Emergency Deficit Control Act of 1985 (also known as Gramm-Rudman-Hollings I), which intended to achieve a zero deficit by fiscal year 1991. Only two years later, when the gap between the deficit and the maximum deficit amounts became too big to be sidestepped through such tricks as one-year tax-revenue windfall, one-time asset sales and accounting gimmicks, Congress moved the zero deficit target back two years to fiscal year 1993. Then the new Budget Enforcement Act of 1990 superseded Gramm-Rudman-Hollings Act, and maximum deficit amounts no longer would be applicable for measuring compliance with the deficit reduction law. Even firm proponents of the balanced budget amendment think that "[t]his history should be proof-certain that Congress will quickly undo any law that gets in the way of deficit budgeting"(Concord Coalition 1996). Opponents of the balanced budget amendment point to this and argue that nothing in principle would prevent Congress from doing the same kinds of tricks on budgets again, even under a constitutional amendment. This could be much more harmful than sidestepping the deficit reduction laws, since the authority of the Constitution would be undermined. Congress may even repeal the Amendment if the enforcement becomes too difficult and the political burden becomes too heavy, as they did in 1933 on the Prohibition Amendment. To these, the proponents answered that Congressmen would respect the Constitution and their oath of office, otherwise would be punished when they seek reelection, and that the balanced budget amendment is drafted both broadly and specifically to prevent further tricks (Concord Coalition 1996).
Another issue that the opponents raise about the balanced budget amendment is the natural business cycle of growth and recession. When the economy falls into a recession, lower incomes and lower profits would cause the revenues from taxation to decline (or rise more slowly), while federal spending on programs like unemployment insurance and welfare programs would increase. Therefore a deficit increase is only "natural" in years when economic growth is sluggish. However, under the balanced budget constitutional amendment, more deficit reduction would have to be made in periods of slow growth than in years of relatively strong economy. As Robert Reischauer observed, the automatic stabilizing effects of the federal government to increase budget deficit in times of weak economy would be lost under the balanced budget amendment. As Clinton administration officials argued, the amendment would dangerously tie the government's hands in times of fiscal crisis -- thereby making recessions last longer and hurt more. To these, the proponents of the amendment contend that under the balanced budget amendment, the government could usually run modest budget surpluses, so that when the economy is weak, the requirement of the constitutional amendment only means to revert to mere balance from budget surplus. They also argue that the amendment already contains a "safety valve" by which "three-fifths of the whole number of each House of Congress shall provide by law for a specific excess of outlays over receipts by a roll call vote". This escape provision, they hold, would guarantee enough fiscal flexibility in the event of a serious economic crisis. However, as I will discuss later in Part IV, opponents hold that the federal balanced budget amendment does not have enough fiscal flexibility even with that escape provision. One of the reasons for that is it would prohibit "rainy day" or reserve funds that the Government can draw upon when its budget would otherwise be out of balance (Lav and Greenstein 1997).
The other objections by the opponents of the balanced budget amendment include that this amendment would have an adverse effect on federal spending for domestic programs that the public demands and that support the standard of living, especially the Social Security. They claim that when the baby boom generation retires, the trust funds will have to spend more on benefit and require large deficit spending, while a balanced budget amendment would prohibit them from doing so. Actually some Democratic Congressmen used to claim that they would support the balanced budget constitutional amendment if the Social Security program and trust funds were excluded from budget calculations. The Budget Enforcement Act of 1990 excludes Social Security trust funds from budget enforcement procedures and now both Parties agree that Social Security should be immune from budget cuts. But some proponents still maintain that no program should be granted special status in the Constitution exempting it from competing with other programs for scarce tax dollars.
Another objection, that the balanced budget amendment would alter the balance of power by allowing the courts to design budget cuts or tax increase and to order such measures to be implemented, has resulted in a compromised version of the amendment proposal in Senate. This version of the amendment proposal prohibits courts from doing so.
1. Why is there budget deficit?
Most of the political science researches relevant to the proposal to balance the budget focus on Congress. A number of works about budget in the 1980抯 concerned themselves with explaining how the process operated or the relationships between process and fiscal policy results. One of the approaches, the theory of public choice, was presented in the political science literature, among the early works is James Buchanan and Richard Wagner抯 1977 book Democracy in Deficit: The Political Legacy of Lord Keynes. They held that microeconomic motives produce plausible explanations of budget actions in Congress. They describe their model as "not at all complex, and it offers satisfactory explanations" of the recent fiscal record. Lawmakers are assumed to be vote-maximizers, voters benefit-maximizers, and bureaucrats power-maximizers, leading to deficit financing as an endemic feature of national fiscal policy. Legislators bear primary guilt for deficit spending, as they distribute benefits to garner votes.
In a 1987 book Deficits, Buchanan offered an explanation for the apparent inconsistency shown by opinion polls that a large majority of Americans is in favor of balanced budget amendments while a much lower fraction of voters is in favor of any specific measure to reduce budget deficits. He proposed that voters do not understand the concept of budget constraint and suffer from "fiscal illusion". In this book, Buchanan attributed the advent of deficits also to a "breakdown in moral constraints". These constraints are "the product of biological evolution, cultural evolution, and possibly, rationally calculated moral pre-commitment"(Buchanan et al. 1987:183).
One of the works along this line but employing an alternative perspective is Guido Tabellini and Alberto Alesina抯 1990 article "Voting on the Budget Deficit" in The American Economic Review. They provided an explanation of budget deficits that is based on the inability of current voters to bind the choices of future voters. This lack of commitment, coupled with disagreement between current and future majorities, introduces a time inconsistency in the dynamic social choice problem that determines the size of budget deficits or surpluses. This paper shows that a large class of individual utility functions leads to a social choice of budget deficits through the analysis of a model in which a group of rational individuals votes over the composition and time profile of public spending. All voters agree that a balanced budget is ex ante optimal. However, if there is disagreement between current and future majorities, a balanced budget is not a political equilibrium under majority rule. Under specific conditions a majority of the voters favors a budget deficit, which tends to increase with the likelihood of disagreement between current and future voters. They predicted that on cross-countries data, more polarized and politically unstable countries should have a larger stock of debt outstanding than more homogeneous and stable societies.
Some critics of this kind of approach offered different types of explanation. They charged that this theory has the same defects as academic Marxism does, that is, "by attributing narrow motives to politicians, it shrinks the world of politics to an analytically manageable size and in so doing limits our understanding of political possibility". In Paul Peterson and Mark Rom抯 1989 article "Macroeconomic Policymaking: Who Is In Control?", they accused Buchanan and Wagner抯 model of ignoring "both the fact that until 1980 the public debt as a percentage of GNP fell steadily throughout the postwar period and the fact that Congress seldom increases expenditures or cuts taxes much beyond what the president proposes", although Buchanan gave a caveat in his earlier book that pleasing constituents through spending does not constitute the universe of legislative motivations.
A more recent critic is Steven Schier. In his 1992 article Deficits without End: Fiscal Thinking and Budget Failure in Congress" in Political Science Quarterly, he argued that for public choice theory and academic Marxism, "legislative life is supposedly less about policy argument than about market-type transactions or class conflict", and that "one need not look to Marx or microeconomics for an explanation, but rather to the thought and actions of Ronald Reagan, George Bush, and the Congress" (Schier 1992:433). He believes that legislators?substantive fiscal convictions, deriving from ideology and practical theories, are an important part of the process of political estimation because they define good policy, and so he gave a schematic overview of legislators?political economy derived from interviews with them and survey of legislative assistants. He concluded that a similar fate to that of the Gramm-Rudman-Hollings act "undoubtedly would befall a balanced budget amendment to the Constitution" (Schier 1992:429).
2. How to reduce budget deficit?
Some political scientists have looked into the procedures that were able, or were intended to reduce the budget deficit. Among this set of literature is Richard Forgette抯 1994 book The Power of the Purse Strings ?Do Congressional Budget Procedures Restrain?. In this book he asked whether congressional budget reforms have been created, designed, and maintained to achieve greater budget restraint, and to what extent these procedures have achieved this goal. Although for practical reasons, this analysis is limited to House procedures, the substantive question that this study focuses on is relevant, both for understanding post-reform congressional budgeting and for predicting the likely effect of legislative procedural solutions that are periodically offered for current political problems. In part 1 of the study, Forgette discussed the establishment of the 302 and reconciliation procedures and concluded that House members did not share a clearly defined overall objective of budget restraint for either procedure at the enactment stage. The second part of the study was an analysis of the design and implementation of the two procedures. Forgette concluded from an empirical investigation of the House Budget Committee that the committee did not come close to meeting any of the twelve expectations regarding how a committee that was directed toward budget restraint would operate. Rather, the House budget committee apparently is designed to assure its role as a representative and attentive agent of the majority-party caucus. The final part of the analysis examined the substantive effect of the 302 and reconciliation procedures. Forgette in the end concluded that deficit reduction has been achieved with the use of budget procedures only when political and policy circumstances made it within the interest of the House majority party. Current House budget procedures are not likely to be used to meaningfully alter current budget policy unless the will to do so is evident among the House majority party. Additionally, any proposed procedural solutions to current budget problems that aim at altering the political incentives of its members are not likely to be any more successful than a majority of members wish them to be.
3. Is the states?experience relevant?
All states but Vermont have legal requirements to balance their budget. 41 states have such requirement in their constitution, and 8 states have it in their legislation. As above-mentioned, in the wake of the states?financial problems created by the 1837 panic, states began to impose constitutional requirements on the legislatures to eliminate or severely constrain their borrowing privileges. In 1842 Rhode Island became the first state to adopt a "balanced budget" amendment requiring "the express consent of the people, to incur state debts to an amount exceeding fifty thousand dollars, except in time of war". Between 1842 and 1860, nineteen states adopted these amendments. These balanced budget requirements vary widely in force and scope. Thirty-seven states require their legislatures to pass a balanced budget, and nearly as many require the governor to sign a balanced budget into law. In contrast, many states?requirements are minimal. For example, California constitution requires only that the governor "submit to the Legislature, with an explanatory message, a budget for the ensuing fiscal year containing itemized statements for recommended State expenditures and estimated State revenues. If recommended expenditures exceed estimated revenues, the Governor shall recommend the sources from which the additional revenues should be provided"(California Constitution, Article IV, 12(a)).
From the early history of those balanced budget requirements in the states, whether they actually worked is not clear. During the period between 1842 and 1860, thirteen of the nineteen states that adopted balanced budget amendments witnessed a drop in their debt load. However, if we look from another perspective, the effects of those requirements were not so encouraging. Despite the requirements to balance the budget, several states were simply not deterred from borrowing and increasing their debt. After 1845 another wave of state borrowing began. Of the 19 states that adopted debt limitations before 1857, 7 states actually increased their debts from 1853 to 1860. Coupled with the efforts of the other states, the collective state indebtedness stood at 257.4 million dollars on the eve of the Civil War, 67.5 million dollars greater than in 1841, and four times the size of the 64.8 million national debt.
Recent researchers found that the state抯 provisions of a balanced budget seem to work reasonably well, and Gramlich concluded that the public saving experience of state and local governments is far better than for the national government (Gramlich 1995:180). However, there are different views. In a recent book What Would a Balanced Budget Mean for California?, Jean Ross argued that "a closer examination of California抯 budgeting practices during the last decade should lay to rest any belief that the state routinely balances its budget", as the "lawmakers have used every trick in the book ?and a few new ones ?during the state抯 six consecutive years of budget deficits"(Ross 1998:Ch. 3). These tricks include internal and external borrowing, shifts in accounting practices from cash to accrual and back again after the budget is approved, questionable modifications of actuarial assumptions used for public employee pension funds, shifting costs to local government, "off-budget" and probably unconstitutional loans to schools, and deferral of needed capital investments. These are only some of the "smoke and mirror" tactics used to develop budgets that could be passed off to the public as "balanced" upon enactment.
Proponents of the balanced budget amendment to the constitution point to the states?experience as evidence that a balanced budget amendment should also work at the federal level. Largely on this conviction, in the 1970抯, 31 states petitioned for a constitutional convention to propose a requirement for balanced budget. One more state joined them in 1983, bringing the total to only two short of the two thirds of the states required to force a constitutional convention for amendment. However, recent research has found that it is not such a simple matter. There are both similarities and differences between the balanced budget requirement at the state level and at the national level, and so it remains unclear whether a constitutional amendment to balance the federal budget would work.
One of the similarities between the balanced budget amendments at the state level and at the federal level is the above-mentioned "smoke and mirror" tactics. Savage (1988:237) analyzed four devices developed by the state governments to sidestep their constitutional restrictions to balance the budget while accommodating their new borrowing needs necessitated mainly by the "internal improvements" such as highway construction. The four kinds of non-guaranteed borrowing are: (1) state agency revenue bonds; (2) borrowing through public corporations, commissions, and authorities; (3) delegating state operations to local governments and agencies; and (4) lease-purchase agreements. Gramlich (1995:180) holds that all real-world balanced budget amendments have significant enforcement problems. Nothing in principle, not even a constitutional amendment, could prevent the states or the federal government from selling assets, changing paydays, moving items off-budget, etc.. There are different views about these enforcement problems, though. Poterba finds that even with those "tricks", constrained state fiscal policy is more responsible than unconstrained state fiscal policy.
A critical difference between the proposed federal balanced budget amendment and those of the states is the treatment of capital budgets. Ross finds that even the most stringent state provisions allow the use of bonded indebtedness as a tool for financing capital investments, such as highways, airports, and public buildings, while the balanced budget amendment proposal requires financing capital investments on a pay-as-you-go basis. As Gramlich pointed out, these also raise enforcement problems. There are a number of measurement problems in defining federal investment, and a number of political problems in enforcing any definition, however sensible.
Still another major difference between the constitutional amendment and state balanced budget requirements, as Iris Lav and Robert Greenstein (1997) point out, is the use of "rainy day" funds. Most states have established reserve funds that can be drawn upon when their budgets would be otherwise out of balance, while the proposed constitutional amendment lacks this mechanism. Gramlich also calls attention to this and proposed that the federal balanced budget amendment should learn from this "nice way to deal with the problem" by the states.
The above discussions of the balanced budget amendment show that this amendment would have mixed results. Despite the beneficial consequences that the proponents have ascribed to it, the enforcement of it still poses problems. The rigidity of the amendment provisions and the tactics employed by the Government to sidestep them might affect not only the operation of the amendment, but also, what is worse, the credibility and authority of the Constitution itself.