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Balanced-Budget Bill Fails Fiscal Test—A Commentary by Stephen L. Carter ’79

The following commentary was posted on Bloomberg.com on August 3, 2011.

Balanced-Budget Bill Fails Fiscal Test
By Stephen L. Carter ’79

At a Washington event in the early 1990s, I happened to find myself seated beside an official fairly high in the White House of George H.W. Bush. We got to chatting, and he waxed poetic about a constitutional amendment requiring the federal government to balance its annual budget.

He even had a new draft in his pocket, words he had scribbled on a cocktail napkin. I don’t recall the precise language, but his version was short, and began something like this: “Except in time of war, the federal government shall not ..."

A free and frank exchange of views ensued.

Fast-forward to today: Republican lawmakers want a quick vote on a balanced-budget amendment (or BBA, as the cognoscenti, I am sad to report, are now calling it). This is an understandable demand given Congressional Budget Office estimates of near trillion-dollar deficits into the near future.

Yet, while I remain skeptical of objections that the amendment would lead to fiscal disaster, I do think its opponents are right on the merits. The amendment is a poorly designed cure for a disease of complex causes.

The American tradition of deficit spending goes back to the Revolutionary War, when the colonies financed their rebellion with borrowed money. Shortly after the constitutional system replaced the Articles of Confederation, the federal government took on the debts incurred by the states, an act that sent the new nation’s debt soaring, by most estimates, to a third or more of GDP.

Founding Fiscal Hawks
That era had its own fiscal hawks, and providing a way to pay down the debt was hotly debated at the constitutional convention. In 1798, Thomas Jefferson wished the Constitution had “an additional article taking from the federal government the power of borrowing.”

The founders’ bills were paid off just in time to start the whole merry-go-round again when the Civil War broke out. Although some historians attribute the Union victory to its superior creditworthiness -- the South faced far higher borrowing costs -- the accumulated debt nearly bankrupted the winning side, and took another half century to retire.

Abraham Lincoln himself wondered how the U.S. would ever pay back the money borrowed to finance the Civil War, fretting that the conflict “has produced a national debt and taxation unprecedented, at least in this country.”

And in the late years of the 19th century, a worried Congress adopted laws restricting the purposes for which the self-governing territories of the West could take on debt, limiting their borrowing to no more than 1 percent of the value of taxable property within their borders.

It was inevitable that the worries would eventually lead to efforts to amend the Constitution. The first came in 1936, when Representative Harold Knutson, a Minnesota Republican, introduced an amendment to limit federal borrowing. It and its successors have all failed, although several proposals in the 1980s and 1990s passed in one chamber of Congress.

Beyond political support, however, the real problem with a balanced-budget amendment is that it would fail to do what its supporters claim: Keep the nation’s fiscal house in order.

Consider Section 1 of a current bill: “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.”

Sounds impressive, until one parses it. We all think we know what a fiscal year is, but legislatures have redefined the term constantly for budgeting purposes. To take the most obvious example, the federal fiscal year begins on Oct. 1. But until 1976, the federal fiscal year began on July 1, and Congress has often extended the fiscal year through a continuing resolution. Businesses are allowed in some circumstances to use a 53-week fiscal year.

Subject to Manipulation
Some experts argue that the fiscal year should be 18 months to allow for smoother budgeting. In short, the amendment is built on a concept both ill-defined and subject to manipulation.

Likewise, consider the rule that outlays must not exceed receipts. Another section defines “total receipts” as “all receipts of the United States Government except those derived from borrowing” -- in essence, taxes, tariffs and fees. “Total outlays” are “all outlays of the United States Government except for those for repayment of debt principal.”

Here’s a quick and easy way for a future Congress to game those definitions: Set up an independent, nonprofit, nongovernmental corporation that issues bonds, for the avowed purpose not of raising revenue but of giving Americans a place to invest their money safely. We might call our new agency the Federal National Bond Association, or Fannie Bae.

Fannie Bae’s bonds would not be quite as cheap as Treasuries, but as Treasuries would no longer exist, these would presumably be the next best thing, because of their implicit federal guarantee. Most of the money Fannie Bae raised in the market would then be turned over to the Treasury, which would place it in a trust fund. (A small part would be kept to run Fannie Bae.) The funds are now just like Social Security -- a “receipt” within the meaning of the amendment -- and “outlays” may therefore rise by that amount.

Now, you might protest that the establishment of Fannie Bae would seem to vitiate the purpose of the amendment. But the federal government gets around constitutional provisions all the time. (Remember the congressional power to declare war?)

Maybe the courts would strike down Fannie Bae, but to imagine them doing so is to accept the likelihood that federal judges would have final say over fiscal policy. As Walter Dellinger, a solicitor general in the Bill Clinton administration, warned recently in the New York Times, “the process of enforcing” such an amendment “would be uncertain and perilous.”

Counting the Receipts
Although one is tempted to respond that this quality, alas, does not differentiate the proposed amendment from any other provision of the Constitution, the more provisions we add, the greater the possibilities for, let us say, unpredictable interpretations.

Furthermore, for the amendment to operate, someone -- presumably the Congressional Budget Office -- would have to figure out each year what the total receipts and total outlays probably will be. Every corporation has to do the same thing, but the prospect of such review proved too much for even the fiscal watchdogs of the Wall Street Journal editorial board: “We doubt the historic 1981 Reagan tax cuts within the Kemp- Roth bill, once subjected to Congress’s revenue-neutrality accountants, could have survived the balanced budget mandate.”

This objection hints at the biggest problem with the proposed amendment: It seeks to enshrine as fundamental law a single theory about the relation of fiscal policy to the operation of the U.S. economy. And this would be a grave mistake.

In microeconomics, the theory of supply and demand is rigorously worked out and often tested. Despite soft spots, it remains the heart of every introductory economics class, precisely because it is concise, understood and essentially correct.

Macroeconomics is of a very different character. It is a field rich with theories difficult to test. One difficulty is trying to model the entire economy, and no matter how many variables are held constant, there is always something important unaccounted for. This helps to explain why economists are all over the map. Keynesians and supply-siders alike can all present data favoring their theories. That is why politicians and the economists whose work they rely on should approach the subject, as Harvard economist N. Gregory Mankiw has put it, with humility.

So the balanced-budget amendment, whatever its political popularity, possesses the following difficulties: It is poorly written and easy to circumvent; it invites judicial control of the appropriations process; and it pretends to know more than we can confidently say we do about how the economy works. For an amendment to the Constitution, those are just too many deficits.

(Stephen L. Carter, a novelist, professor of law at Yale and the author of “The Violence of Peace: America’s Wars in the Age of Obama,” is a Bloomberg View columnist. The opinions expressed are his own.)