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1. The purpose of fiscal rules

Fiscal rules are not simply for accounting, nor only to meet budget targets. They should facilitate responsible governing. That includes avoiding the overuse of “common-pool resources”[1] such as American taxpayers.

Unfortunately, that bears little resemblance to the irresponsible “governing” practiced lately. Congress repeatedly chooses the short-term path of least resistance while pushing challenging trade-offs into the future.

America’s debt didn’t appear suddenly. It grew, month by month and year by year.[2] One crisis or failure of leadership at a time.

The longer Congress waits to address imbalances, the harder it becomes. Catching up on deferred maintenance while keeping up with day-to-day matters is hard. Eventually it seems insurmountable.

The past cannot be undone, but we can recover. Better fiscal rules can facilitate real governance and the practice of politics. In other words, public agents—primarily members of Congress—would collectively make choices and set priorities under constraints from enforceable fiscal goals.

Not every use of taxpayer funds is equally valuable. Curtailing lower-valued activities liberates resources for higher-valued functions. Setting priorities is political and subjective, but competition between programs and visions can improve the return on investment to the American people.

Setting and enforcing targets has other benefits, such as reducing the prospect of a fiscal crisis. Maintaining lenders’ faith in the credit of the American sovereign is crucial to the stability of and support for our system of government. Retaining the ability to borrow during emergencies requires prudence during times of plenty.

Fiscal responsibility gives policymakers and the public ongoing reasons to search for and eliminate waste. Waste, fraud, and abuse squander taxpayer resources, invite corruption, and undermine the public’s trust in our institutions.

The objective of fiscal rules is sound governance. The character of those rules matters immensely.

2. Principles for effective fiscal rules

Sound governance does not belong to any particular political party or political philosophy. It is simply the institutionalization of the classical virtues of prudence, justice, courage, and temperance. Prudence to maintain the polity for the long-term with a margin for the unexpected. Justice for future generations to not be robbed by their elders. Courage to resist the unjust demands of powerful interests against the unorganized public. And temperance to accept limits on what government can reasonably take from the people or achieve on their behalf.

Republicans and Democrats can both display civic virtue or practice vice. The rules that structure their incentives tip the balance one way or the other, depending on external circumstances as well as individual knowledge and characters.

The best rules guide interest into socially productive functions. Albert Hirschman’s doux commerce hypothesis[3]—that market systems make serving our fellow man through mutual exchange more appealing than plundering him—has parallels in the public sphere. Self-interest is hardly the exclusive motivation of policymakers, but it matters.

Ideally then, effective fiscal rules would encourage informed trade-offs between priorities. They would promote learning and knowledge so legislators have sound reasons for their preferences and the ability to explain them to the people they represent.

3. Constitutions promulgate principles

Constitutional fiscal rules have been sought without success since the beginning of the republic. Observing ruinous debt in Europe, Thomas Jefferson wished it were possible to amend the Constitution “taking from the federal government the power of borrowing.”[4] Nonetheless, he and all other responsible statesmen have recognized the need to borrow for emergencies, especially war.

Popular support is high for amending the Constitution to end chronic borrowing through balanced budgets. A 2011 poll found that 74 percent of respondents favored “a constitutional amendment to require a balanced federal budget.”[5] The people know that Congress cannot control itself without external discipline. When crafting a balanced budget amendment (BBA), however, several considerations are crucial.

First, constitutional provisions are principles. They are not legislation. They are not self-enforcing. They are not detailed. They do not usually specify who is to do what, when, or how.

They are broad statements of consensus. Putting them into practice depends on the normal legislative process and what can be enacted and sustained. Generality fosters consensus at the constitutional stage, which in our system requires two-thirds of both houses of Congress and three-fourths of State legislatures to ratify.

Second, the process for approving constitutional amendments needs to be kept in mind. Under current rules of the Senate[6] and the House of Representatives,[7] the Committee on the Judiciary of each body has jurisdiction over all proposed amendments to the Constitution, no matter the subject. Jurisdiction over implementing legislation for an enacted constitutional amendment, however, varies by subject matter. For a BBA, the Budget Committees would take the lead.

Third, the specific language of BBA proposals has prevented prior passage. General support for binding fiscal rules exists in the public and even among members of Congress. As always, the devil is in the details, and some versions are positively possessed.

These three elements—politics, process, and policy—determine prospects. Additional perspectives on possible implementing legislation and policies needed to reach balance factor in as well. The remainder of this chapter will be divided between specific discussion of constitutional rules and a more general discussion of statutory implementing legislation. The latter case is partly due to space and partly because the details are still under development. A future book should explain both further.

Most BBAs have many problems.

The “traditional” BBA approach is represented by H.J.Res. 2,[8] introduced by Rep. Bob Goodlatte (R-VA). Obviously it keeps failing, or this book would not be needed. Two-thirds of both houses for constitutional amendments requires 67 votes in the Senate and 290 in the House (no vacancies or absences).

H.J.Res. 2 failed in the House most recently in April 2018 by a vote of 233-184[9] (55.9%) with six Republicans opposed and only seven Democrats supporting. A prior version failed 261-165[10] (61.3%) in November 2011 with four Republicans opposed and 25 Democrats supporting. In December 2011, 67 senators voted for one of two BBAs, 47-53[11] for the “conservative” version and 21-79[12] for the “center-left” version. One Republican backed both.

The balance requirement is the most basic element. Nearly all BBAs, including H.J.Res. 2, require annual balance. That’s a mistake.[13]

U.S. revenue policies in a dynamic economy yield a volatile revenue stream. Attempting to bind revenue and spending tightly together each year would force considerable policy instability into both sides. Planning beyond the short term would challenge both recipients of federal funding and those who pay for it, not to mention Congress. This instability would increase policy-based risk premiums into planning, reducing investment and undermining our prosperity.

Federal policies naturally include what Keynesian economists call “automatic stabilizers.” Recessions depress revenue and boost spending. The result is (greater) deficits.

During recessions, revenue falls below trend growth simply because overall profits are lower, total household income declines, and payroll tax collections drop as workers lose income. On the spending side, increased joblessness boosts demand for safety net programs like health, nutrition, and income support programs like Medicaid, Supplemental Nutrition Access Program, and unemployment compensation.

Annual balance, strictly enforced, would interfere with these automatic adjustments. Whether these counter-cyclical policies stabilize the economy in a Keynesian sense, their fiscal impacts are clear. This creates formidable political and policy headwinds for annual balance.

It gets worse. These proposals define balance between receipts and outlays. Outlays occur when federal agencies pay out to individuals and contractors. Congress does not directly control outlays. Congress controls budget authority, which is the authority for agencies to spend. Budget authority is like the agencies getting a paycheck. Outlays are when agencies cut checks for goods and services, so outlay timing is irregular.

These BBAs invoke the “fiscal year.” Such a definition is a task for implementing legislation. Simple “year” is appropriate for the Constitution.

Many BBAs would change the balance of powers between Congress and the president. They would require the president to submit an annual budget proposal that balances and meets other stipulations. Under the Constitution, the president’s main budget-related jobs are to sign (or veto) appropriations legislation and to take care that the laws are faithfully executed. Statute already requires the president to submit a budget proposal,[14] and that’s where it belongs, not in the Constitution.

The next element is the “safety valve”—exceptions to the balance rule. H.J.Res. 2 has three. First, three-fifths of the whole number (every current member, whether voting or not) of each house could deficit spend for any reason. Second, a majority of the whole number of each house could do so during a military conflict. Third, a declaration of war would automatically suspend balance.

A safety valve is vital. Emergencies happen, and without a useable exception from balance, the political will to sustain balance would crumble. But do different circumstances require different thresholds, and what is appropriate for threshold(s)?

Emergencies take many forms. The political question is whether the emergency justifies an exemption from balance. The threshold should be uniform. Looking to history, Congress has overwhelmingly supported the vast majority of emergency circumstances. And if a supposed emergency or the proposed response to it can’t get broad support, perhaps that’s a sign that something about it is ill-advised.

The appropriate threshold level is a compromise between competing factors. It must be low enough to be useful for emergencies and to prevent a small, cohesive group from leveraging it for something else. It must be high enough to discourage frivolous use and to preserve the norm of balance. Three-fifths—the effective threshold for Senate approval—is clearly too low to serve as an effective check.

The initial transition to balance is the last vital element of a BBA. The federal deficit is $1 trillion per year and rising fast.[15] Congress needs a realistic period to make the substantial changes to reach balance.

It isn’t easy, and it would take time. The latest budget resolution from the House Budget Committee includes assumptions to balance within ten years, but no one expects every assumption to be enacted. It assumes $8.1 trillion in deficit reduction over the ten-year window, yet only $302 billion would be cut with the fast-track deficit-reduction “reconciliation” process.[16] Even that 3.7 percent of the total would require the House and the Senate to agree on a budget resolution, for both to approve reconciliation legislation, and for the president to sign it. None of these steps have occurred for fiscal year 2019.

Republican budget resolutions do not, of course, include revenue increases for deficit reduction. Democrats are certain to insist on them as the price of support for a budget deal. The challenge is finding the policies that will satisfy that impulse while minimizing effects on prosperity.

Even putting all spending and revenue options on the table doesn’t mean that balance can be reached quickly in a politically acceptable way. Most policy changes must be phased in. Proposals that would require balance in two, three, or even five years (as in H.J.Res. 2) after ratification are just not realistic.

These are the most universal problems. Many others exist.

Some demand supermajorities for raising the debt limit. First, the debt limit is another statutory construct that doesn’t belong in the Constitution. In addition, the Constitution grants Congress the power to borrow in Article I, Section 8, clause 2, so the debt limit may already be excessive delegation. Further, a well-crafted BBA and implementing legislation would control the debt, making a debt limit redundant at best. Finally, constitutional provisions should be principles and as simple as possible.

Many Republicans would limit spending as a percentage of GDP or establish supermajorities to increase revenues. Democrats oppose both, and their support is needed to establish and sustain fiscal rules.

A constitutional rule must accommodate a range of policy options and governance visions. Otherwise there is no consensus, and no BBA is possible. The size, scope, and content of government must remain the domain of normal politics within the constitutional framework, which would now include a requirement for balance.

Some would exclude certain programs from balance. Certainly, some programs should be insulated from enforcement under implementing legislation, but all must be included for balance to be meaningful.

Most BBAs have serious political and policy shortcomings. Two have a chance.

 

Crafting a basic, principles-based BBA

Constitutional language should be simple, establish broad principles, and leave the details to legislation.

Budget process is complicated, but at the constitutional level, only three elements are needed: 1) the balance requirement, 2) an exception, and 3) a transition to balance.

The rule for balance

In theory, it could be as simple as “The budget shall be balanced” and statute could do the rest.

In practice, slightly more specificity makes sense. The most recent BBA I wrote [17] for a House member begins:

Expenditures and receipts shall be balanced, which may occur over more than one year to accommodate economic conditions.

The version I previously wrote[18] for another House member is even more precise:

Total expenditures for a year shall not exceed the average annual revenue collected in the three prior years, adjusted in proportion to changes in population and inflation.

If the Constitution must detail the mechanics of balance, the latter is an excellent choice. It would make spending and revenue policies far more stable and predictable than annual balance. It would establish a countercyclical budget rule to accommodate adjustments during recessions.

Yet balance need not be precisely defined in the Constitution. A general principle is enough to create the expectation of balance and the flexibility to adapt to business cycles. On language, “expenditures” and “receipts” are the general terms that already appear in the Constitution.[19]

 

Emergency spending

A fiscal rule’s survival depends on a careful exception. Emergencies happen, and sometimes strict balance doesn’t make sense. The statutory challenge is to offset the emergency over a reasonable period thereafter. Otherwise it could become an often-used loophole.

Many BBAs would set aside balance more easily for military contingencies than for other emergencies. Sometimes extra funds would be limited to the conflict. Sometimes the contingency would suspend balance for everything, which could even encourage wars to avoid fiscal discipline.

Deviating from balance should happen under a single, uniform threshold. Some emergencies are more important than others, and those are most likely to have broad support. Simpler is better to avoid games and creative definitions.

How high the threshold should be matters. Following Buchanan and Tullock, [20] political externalities—excessive debt—must be balanced with workable transaction costs: providing appropriately for emergencies in this case.

The traditional BBA threshold of three-fifths is too low. The Senate effectively requires three-fifths to pass legislation. Following ratification of a BBA, it might matter more, but perhaps not.

Higher levels are possible, such as the two that already appear in the Constitution: three-fourths and two-thirds.

Three-fourths would tend to reserve emergency spending for real emergencies. It’s also low enough to cause difficulty in organizing enough members—109 members is a fourth of the House—for them to have leverage over the measure, especially in the face of an emergency.

Three-fourths would, however, affect the presidential veto.[21] After congressional majorities pass legislation, the president may veto if he disapproves. Congress can then attempt to override the veto with a two-thirds vote in both houses. Creating a three-fourths standard for emergency spending would establish a novel, second veto-override threshold.

Two-thirds is a plausible choice to bring discipline, especially combined with public expectations and implementing legislation. Organizing small groups to obtain leverage would be even more difficult while also ensuring broad bipartisan consensus. It preserves the normal veto process. Finally, it is already by far the most common constitutional supermajority.

A two-thirds supermajority for exceptions to balance has strong constitutional and economic foundations. In U.S. history, major emergency situations have generally obtained at least two-thirds in both Houses. When they haven’t, some responses were intentionally drafted to pass more narrowly, such as the 2009 stimulus bill. Others may not have been worth doing in any case. A more complete discussion of marginal cases must wait for another venue.

Transition to balance

The last crucial element is moving from the profligate status quo to initial balance. The BBA paradox is that public demand and congressional interest are highest when a politically viable path to balance is hardest to imagine. When deficits are lower and less threatening, pressure for binding fiscal rules is lower.

A well-crafted BBA must accept and accommodate this reality if it is to succeed. Despite the short-term incentives created by frequent elections to the House of Representatives, members are fully capable of thinking longer term and sometimes do so.

Even if a BBA with a short transition were somehow ratified, it would either create unnecessary adjustment pain or encourage Congress to reach for the emergency spending valve. Either outcome—or both—would corrode public support and congressional norms to faithfully practice fiscal responsibility.

Reaching balance would occur over the period specified in the BBA plus the time it takes for three-fourths of state legislatures to ratify it. Ratification would likely take one to four years, based on prior constitutional amendments.[22] If the amendment allowed a ten-year transition, Congress would probably have eleven to fourteen years to reach balance after sending a BBA to the states.

It’s a long time, but not that much longer than the assumptions embedded in budget proposals. The latest budget resolution produced by House Budget Committee Republicans assumes balance in nine years. Comparable budget resolutions would normally have the support of a majority of the House. As a Republican vision document, however, it attracts no Democrats’ votes and includes more spending cut assumptions than are likely to be enacted.

Enacted reforms to reach balance would therefore take at least a decade. Working out these bipartisan deals will be a difficult challenge, but they can be done with enough time and with rules that do not presuppose policy outcomes other than ending chronic deficits.

On the other hand, the time to reach balance cannot be too great, or it will seem like more empty promises. The momentum from enacting a BBA must immediately transfer to implementing legislation and policy reforms. Even a quickly adopted comprehensive deal would take most of a decade to fully phase in. A ten-year transition following a few years for ratification seems to be about as fast as can realistically be expected.

A principles-based BBA can succeed

The last BBA proposal I wrote for a member of Congress[23] meets these criteria and has had more than 60 bipartisan cosponsors:

Section 1. Expenditures and receipts shall be balanced, which may occur over more than one year to accommodate economic conditions. Expenditures shall include all expenditures of the United States except those for payment of debt, and receipts shall include all receipts of the United States except those derived from borrowing.

Section 2. For emergency situations two-thirds of the House of Representatives and the Senate may for limited times authorize expenditures exceeding those pursuant to rules established under section 1. Debts incurred from such expenditures shall be paid as soon as practicable.

Section 3. Congress shall have power to enforce this article by appropriate legislation, which shall allow not more than ten years after ratification to comply with section 1.

In summary, constitutional language differs from statutory language. It establishes principles, which are given life by implementing legislation. Supposing the proposal above is close to the ideal BBA language, the statutory framework for defining, tracking, and enforcing these principles is at least as important.

That ongoing project will comprise the rest of the chapter. Deeper discussion of BBA design and implementing legislation will, I hope, eventually receive book-length treatment.

4. Statutes implement principles by navigating effectiveness and sustainability

Statutes turn constitutional principles into governing instructions. They define terms, establish procedures, create accountability, and otherwise guide executive and legislative process. They give the public—and sometimes the courts—the details needed to judge whether the principles are being faithfully followed.

Defining balance and keeping track is the first objective. Enforcing it and encouraging politicians to comply is the greater challenge. Many of these options can be enacted without a balanced budget amendment in place, although the public consensus for balance wouldn’t be as strong and supermajorities for emergency spending would not be enforceable.

Setting fiscal goals

Fortunately, Switzerland provides a model for defining and tracking balance. Article 126 of the Swiss constitution provides the principle,[24] and implementing legislation is codified in the Federal Law for the Confederation’s Budget. Upon my request, the Law Library of Congress produced a report explaining and translating these provisions.[25]

The Swiss generally require balance over the business cycle. A “compensation account” tracks adherence to an annual spending cap. The revenue-based cap accommodates the business cycle to be mildly countercyclical. A post-fiscal-year review determines whether spending has exceeded the limit, and if so, the subsequent spending cap must compensate.

Emergency spending is tracked with an “amortization account.” This is only available if the necessary spending exceeds a certain amount, thus encouraging the government to seek offsets for relatively small unanticipated needs. Crucially for continued consensus, the rule leaves choices about the mix of spending reductions and revenue enhancements to the regular political process. Emergency spending above a nominal amount must be repaid within three or six years, depending on the size, and this window can be extended in the case of ongoing or recurring needs.

The U.S. cannot immediately adopt a business-cycle-balanced-budget rule, of course, without a specified statutory transition. It would be possible to allow spending to exceed a revenue-based spending cap by gradually declining amounts each year until balance is reached. Congress would have full flexibility to choose fewer services and less revenue or more services and greater revenue.

Another approach could reach the same goal. (A benefit of keeping specifics in statute is that they can be more easily altered as circumstances change.) Suppose that spending doesn’t grow faster than GDP, and spending growth slows if the debt burden increases. Both parts are needed because a spending rule may not reach balance if it is disconnected from revenue. A debt brake eventually ensures that the gap between spending and revenue closes, the budget balances, and Congress lives within its means.

Simply limiting federal spending growth to GDP growth would begin to stabilize the budget, mostly by making spending binges harder and less frequent. To curb debt growth, the spending growth rate could be reduced a small amount—a fraction of a percentage point—each year that the debt grew as a percentage of GDP.

An additional rule should address long-term, unfunded liabilities, which annual cash-flow accounting does not. Promised pension and health care spending without commensurate funding has become a serious challenge in both the public and private sectors. Today is yesterday’s distant future, and the past’s easy promises are coming due.

One such option would state that the fiscal gap cannot expand, or perhaps must be reduced over time. The fiscal gap is the difference between projected spending and projected revenue, all discounted to current dollars.

Adapting the Swiss framework to American laws and institutions not technically complicated. The challenge is enforcement. Switzerland lacks specific enforcement provisions, yet it has faithfully maintained fiscal discipline, even during the 2008 financial crisis and its aftermath. Yet the political system, culture, and geopolitical position of Switzerland differs substantially from the United States.

Consider the political dynamics of rule compliance in the presence or absence of explicit enforcement mechanisms. Put simply, fiscal rules are meant to constrain political externalities imposed on the body politic and taxpayers-at-large by well-organized factions.

In the classic problem of concentrated beneficiaries imposing small costs on the many, the many are unjustly burdened, but the imposition isn’t enough to motivate most to take political action. The relatively few beneficiaries each get big benefits, so the benefits of political participation outweigh the costs.

Dividing legislative power between differently constituted House and Senate has often checked majoritarian impulses. It has been less effective checking concentrated beneficiaries. Proliferating special programs and exemptions in spending accounts, revenue policies, and regulatory structures bears witness to the ability of special interests to prevail over regular taxpayers.

Fiscal rules make it harder for Congress to play Santa Claus. Deficits are $1 trillion and rising. With outlays of nearly $4.5 trillion this year, 22% of federal spending is going on the credit card.[26] There’s little discipline. Politicians don’t have a ready excuse for not doing what a powerful interest wants. A balance rule changes those dynamics.

Caveats on automatic budget enforcement

Enforcement mechanisms should ensure that missing the agreed-upon targets has consequences. Yet there are grounds for caution.

First, politicians may rely on the rules too much. The path of least resistance is often to avoid action. If the rules address a problem tolerably well, politicians are less likely to seek better ways of reaching fiscal goals. They may prefer to focus on other things when they and the public think it’s being addressed. Of course, the perfect can’t be the enemy of the good, and mostly responsibility is better than not at all.

Second, the rules get blamed for constituent impacts. Following the Budget Control Act of 2011, many politicians didn’t believe—or claimed as much—that the sequester cuts and subsequent caps would happen. The caps became a lightning rod for criticism, even though majorities of the House and Senate voted for them.

These risks are connected. Political durability requires maintaining consensus that the approach taken was among the most reasonable options. When the rules operate mechanically and few politicians have a stake in defending the outcomes, the public dialogue shifts to the rules and may unravel the consensus that established the rules in the first place.

It is possible, at least sometimes, that following the rules without explicit enforcement mechanisms may be more politically effective and durable. In Switzerland, each budget and associated policy choices require the legislature’s consent. The shared experience of affirming the package provides credibility and staying power that automatic enforcement may not.

Enforcement of budget goals

With that significant caveat, automatic enforcement is probably needed in the United States. The budget involves all spending—direct and discretionary, domestic and foreign, on-budget and off-budget—and all revenue policies. Enforcement must touch each category.

Enforcement has multiple purposes. Some aspects would automatically enact fiscal consolidation. Others would encourage policymakers to act. Some would do both.

Discretionary enforcement

Annual appropriations–“discretionary” spending—includes programs generally considered to be core government activities: defense, foreign affairs, homeland security, the courts, and so on. It includes some federal components of transportation, housing, education, health care, veteran programs, agriculture, and others.

These accounts were the main target of the Balanced Budget and Emergency Deficit Control Act of 1985 and the Budget Control Act of 2011 (BCA). Both imposed caps on separate “security” and “non-security” discretionary categories, enforced by across-the-board sequestration of “non-exempt” spending if total spending would otherwise breach the caps. Under the BCA, OMB-ordered sequestration happened only once: in 2013. Since then, Congress has been free to reallocate funding under the caps.

Discretionary spending is a small and declining fraction of total spending, but it is politically sensitive. Much direct spending is made up of transfer payments to individuals, but they are relatively poorly organized. Recipients of discretionary spending, however, are highly organized and politically active. Constraining these accounts has not been durable.

Lesser limits may be possible within a comprehensive framework. The defense and non-defense discretionary caps could return at the current, most recently enacted levels, if spending exceeds one or more targets described above. No nominal cuts. Congress could prioritize within the limits. Related options include 1) breaking the firewall between defense and non-defense, so trade-offs can take place across the entire range of appropriated programs, and 2) allowing discretionary increases if properly offset.

Another discretionary option is to automatically continue current funding if Congress fails to pass appropriations legislation. An automatic continuing resolution would prevent an impasse from causing a shutdown. This need not involve periodic cuts, as often proposed, but simply freeze current funding. As I explain elsewhere[27], this would narrow the decision set and reduce the scope of conflict. New spending deals would have to improve on the status quo, as judged by congressional majorities, instead of merely better than a shutdown, which no one really wants.

The incentive to appropriate would remain. Changing priorities require funds to be reallocated. Moreover, an automatic continuing resolution that freezes spending would require new appropriations to adjust for population growth and inflation, at least. Combined with tempered views on the scope of the possible, the appropriations process would likely run smoother.

Enforcement could also distinguish between authorized and unauthorized appropriations. Some $318 billion[28] of discretionary spending, almost entirely in non-defense accounts, does not have an active authorization of appropriations from the committees of jurisdiction. In the State and Foreign Operations Appropriations Act accounts, for example, about 98 percent of spending lacks a current authorization.[29] A 1-2 percent increase to authorized programs under an automatic continuing resolution could let them keep up with inflation while encouraging authorizing committees to update and reauthorize other programs.

Discretionary spending is not driving our deficit and debt trajectory. It is, however, what Congress spends the most time considering. Automatic enforcement must address other budget factors, but it cannot ignore Congress’ primary focus.

Direct spending enforcement

Direct spending programs don’t require recurring congressional authorization to spend funds. They are the primary fiscal challenge. Collectively they are 70 percent of spending and grow faster than the economy. That cannot be sustained indefinitely. These programs include Social Security, Medicare, Medicaid, many veterans’ benefits, federal civilian and military retirement, Supplemental Security Income, agriculture programs, food stamps, and others.

Many recipients depend on them due to old age, illness, or other challenges they cannot easily address, if at all. Others have employment-based eligibility, like pensions and veterans’ benefits. The financial security of individual Americans is at stake, so reforms must be done carefully. Nonetheless, options for automatic enforcement while protecting the vulnerable are available.

Some of these programs have been subject to automatic enforcement under statutes that apply across-the-board cuts to “non-exempt” programs. This approach is relatively easy to negotiate and draft. If implemented, it would reduce expenditures and perhaps nudge Congress to grapple with fiscal imbalances to avoid these specific mechanisms.

In practice, however, such across-the-board cuts are politically unsustainable. Programs are diverse, but one rule for all makes organizing their beneficiaries relatively easy. This approach also avoids the vital question of protecting the most vulnerable or providing adequate time for those who can adjust their expectations to do so.

The key is to identify parameters that can be adjusted incrementally, repeatedly, and perhaps with some delay. Those who are least able to adapt should be affected least. Even those who can adjust will often need time.

For example, Social Security (Old Age and Survivors Insurance) is the largest federal program at nearly $900 billion in FY 2019.[30] Focusing on old age benefits, at least five incremental, repeatable options exist for targeted benefit reductions and two for revenue increases. The size of each option or whether to include it, is a political question as much as a technical matter.

On the spending side, the normal retirement age (increasing to 67 by two months per birth year) could be increased further, as could the early retirement age, currently 62 years. A worker becomes a “fully insured individual” after 40 quarters (10 years) of qualifying work, and benefits are based on 35 years of work history. One or both could be extended. Finally, the “bend points” for calculating initial benefits could be reduced or the thresholds at which each applies could be changed, thus preserving full benefits for lower lifetime earners while reducing them for higher earners who are more likely to have other retirement income.

On revenue, the Social Security payroll tax rate or the contribution base could increase. Many other options exist to save and strengthen Social Security.[31] Automatic budget enforcement, however, favors changes that can occur incrementally, repeatedly, and possibly with timing lags.

A similar approach could be taken for many other programs. Not every possible tweak should necessarily be included, but this approach is a credible alternative to clunky, politically unsustainable across-the-board cuts to direct spending programs.

Revenue enforcement

Revenue options must also be considered, as unpleasant as it may be to shift even more resources from the private to the public sector. We have a spending problem that cannot be fixed with tax hikes. Some amount of revenue increases is politically necessary, however.

Both Republicans and Democrats need to support a durable deal for fiscal consolidation. Both sides will have to accept tough choices to prevent fiscal calamity, and all need to be able to claim “wins.”

In addition, government already burdens the productive sector with borrowing. Debt finance is a hidden cost with pernicious effects. Reducing borrowing by necessary spending reductions and relatively small revenue increases is still a large net reduction in government burden.

As with spending, enforcement on revenue policies can be done incrementally and repeatedly. The precise composition should give strong weight to the least harmful ways of revenue raising. In the language of economics, the ideal options would impose the least deadweight loss, that is, they would minimize the excess burden of taxation.[32] By this standard, income taxes—corporate and individual—should be off the table. Tax expenditures relative to a consumption base, rather than the Haig-Simons comprehensive income base, are also an option.[33]

Political enforcement

Political enforcement may also be useful. Identifying those that are both effective and appropriate is challenging, however.

“No Budget, No Pay” has been popular. Yet passing a budget resolution—which has limited policy effects—is only one aspect of Congress’ job. Why should that be the thing that determines when and whether they get paid? It puts more pressure on members who need their salary compared to their wealthy colleagues. Doing a budget resolution doesn’t mean that it’s a good one. Far from clearly helping, “no budget, no pay” may also lead to charges that members supported the budget resolution selfishly to get paid, not because it was any good.

Other political enforcement options have similar dynamics. That doesn’t necessarily disqualify them, but more consideration of the future political and policy impacts is needed to decide if, on balance, each advances the public good.

A few political enforcement options stand out. First, if Congress meets responsible fiscal targets, they shouldn’t have to vote on increasing the debt limit. It could be automatically suspended until a target is breached, after which “extraordinary measures” would give Congress several months to get back on track or face that vote.

Another option is a fast-track process for popular, major-deficit reduction legislation several times per year. A concept I’ve developed would apply to legislation scored as reducing the 10-year deficit by five percent. The bill with the most cosponsors would go first. The second and third would be those with the most cosponsors that had not cosponsored a bill considered this way earlier in the year.

It would be like reconciliation but could include any combination of spending cuts, revenue increases, and regulatory reforms. It would bypass the committees of jurisdiction, injecting competition into the system and encouraging authorizing committees to manage programs under their responsibility. If this process is only available when deficits are projected every year for the next decade, it would help normalize deficit reduction until balance is in sight. Finally, it would encourage diverse coalitions to come up with feasible approaches to fiscal responsibility.

5. Conclusion

A well-crafted balanced budget amendment[34] to the Constitution can succeed politically and as policy. Its congressional passage and ratification in the state legislatures would establish a national consensus that getting to balance in a reasonable period is the appropriate fiscal goal. It would also create an enforceable supermajority standard for emergency spending.

Defining “emergency spending” and much more belong in implementing legislation. Such a statute is not a single rule, but a bundle of mutually reinforcing rules that set expectations and encourage legislators to follow them.

Further reforms may be useful or even needed: to the statutory budget process, to the rules of the House[35] and the Senate[36], to the rules of the Senate[37] and House[38] Republican and Democratic conference rules, and perhaps campaign and electoral rules.

No single rule can adequately address our fiscal management or other governance challenges. Every new rule or rule change affects a complex structure of rewards and punishments for policymakers, their staff, advocacy organizations, administration officials, state and local officials, the American public, and even foreign policymakers. Attempting to understand and coordinate them all may be beyond the scope of any mind.

We cannot hope for a silver bullet. Neither can we hope to fix everything all at once. We can, however, focus on a limited set of rule changes with the best prospect for improving our governance as it exists, not as we wish it were. As we observe and learn, as spectators or participants, other opportunities or mistakes to correct will come into focus.

No system of government has ever been perfect. With humility, hard work, and perseverance, however, we can make it work better than it has before.

 

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References

[1] http://www.independent.org/pdf/tir/tir_01_3_brubaker.pdf

[2] https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm

[3] Albert Hirschman, The Passions and the Interests: Political Arguments for Capitalism Before its Triumph, 1977.

[4] https://founders.archives.gov/documents/Jefferson/01-30-02-0398

[5] https://i2.cdn.turner.com/cnn/2011/images/07/21/rel11b.pdf

[6] https://www.rules.senate.gov/rules-of-the-senate

[7] https://rules.house.gov/resources

[8] https://www.congress.gov/bill/115th-congress/house-joint-resolution/2/text

[9] http://clerk.house.gov/evs/2018/roll138.xml

[10] http://clerk.house.gov/evs/2011/roll858.xml

[11] https://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=112&session=1&vote=00228

[12] https://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=112&session=1&vote=00229

[13] http://www.igmchicago.org/surveys/balanced-budget-amendment

[14] http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title31-section1105&num=0&edition=prelim

[15] https://www.cbo.gov/system/files?file=115th-congress-2017-2018/reports/53651-outlook.pdf

[16] https://budget.house.gov/budgets/fy-2019-budget/

[17] https://www.congress.gov/bill/115th-congress/house-joint-resolution/119/text

[18] https://www.congress.gov/bill/115th-congress/house-joint-resolution/15/text

[19] Article I, Section 9, clause 7, U.S. Constitution.

[20] James M. Buchanan and Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy, 1962.

[21] U.S. Constitution, Article I, Section 7, clause 2.

[22] https://www.usconstitution.net/constamnotes.html

[23] https://www.congress.gov/bill/114th-congress/house-joint-resolution/55/text

[24] https://www.admin.ch/opc/en/classified-compilation/19995395/index.html#a126

[25] https://www.loc.gov/law/help/debt-brake/debt-brake.pdf

[26] https://www.cbo.gov/system/files?file=115th-congress-2017-2018/reports/53651-outlook.pdf, p. 44.

[27] https://www.washingtonexaminer.com/congress-can-and-should-end-government-shutdowns-for-good

[28] https://www.cbo.gov/system/files?file=2018-07/54126-eeaa-house_2_0.pdf, p. 3.

[29] https://www.congress.gov/115/crpt/hrpt829/CRPT-115hrpt829.pdf, pp. 133-134.

[30] https://www.cbo.gov/system/files?file=115th-congress-2017-2018/reports/53651-outlook.pdf, Table 2-2.

[31] https://www.cbo.gov/publication/51011

[32] https://object.cato.org/pubs/pas/PA669.pdf

[33] https://www.gpo.gov/fdsys/pkg/BUDGET-2009-PER/pdf/BUDGET-2009-PER-8-3.pdf

[34] http://thehill.com/blogs/pundits-blog/the-administration/315423-a-well-crafted-budget-amendment-can-succeed

[35] https://rules.house.gov/resources

[36] https://www.rules.senate.gov/rules-of-the-senate

[37] https://www.republican.senate.gov/public/_cache/files/8b17dea9-21b7-4087-af04-c52864a56adc/CFE9537A78C0FE0D7F169E4C33588B3A.conferncerules2017.pdf

[38] https://www.gop.gov/115th-rules/

 

Effective Fiscal Rules Build on Consensus

4 thoughts on “Effective Fiscal Rules Build on Consensus

  • John Merrifield
    December 26, 2018 at 4:44 PM
    Permalink

    Maybe: “The specific language of BBA proposals has prevented prior passage.”

    Here’s an alternative stated as a mission: Part of the objective of the Friedman Project is develop a fully vetted menu of fiscal rule options, and one of the things to fully vet for is the absence of any politically viable excuse to avoid fiscal restraint. Specific language may or may not have provided a political refuge from which to vote no.

    Consider a BBA vote by congress a few years ago. It ‘failed’ to achieve the 2/3 vote, by one vote in the Senate. It achieved BBA defeat, by design, at least political cost. If we were to re-visit the vote, I believe we’d discover that the 34 ‘no’ votes came from the 34 safest seats. It’s one of the most disgusting things about the political process. You can’t trust a voting record on tough votes to accurately depict true support/opposition. A vote is ‘there’ if needed on key legislation, but cast otherwise to look good to a reps constituents.

    Reply
  • John Merrifield
    December 26, 2018 at 4:49 PM
    Permalink

    Again, reading further, I offer a cynical alternative.

    BBA proposals are deliberately written, or revised/amended, to contain poison pills such as “annual balance” and failure to allow emergency spending w/o suspending the BBA.

    Reply
  • Avatar
    December 27, 2018 at 1:10 PM
    Permalink

    I don’t rule out cynical motivations, but other factors seem more likely here.

    Milton and Rose Friedman included a complicated and specific spending limit amendment (prepared by the Federal Amendment Drafting Committee) in Appendix B of their excellent book Free to Choose. Similarly, Mark Levin’s BBA among his “Liberty Amendments” has many problems. In neither case does cynical political motivation seem likely.

    Likewise, most members proposing BBAs seem to be sincere. Yet very few give sufficient attention to a proper approach to constitutional language–an ongoing, years-long process for me–or to the economic, political, and process implications of proposed rules.

    Reply
  • Avatar
    January 4, 2019 at 10:50 AM
    Permalink

    I found this chapter to be carefully drafted. It benefits from the precise description of the problems and proposals for budget process reform, whether at the constitutional level, the statutory level or the rule-based level. It might benefit from some beefing up the quantitative analysis, both in terms of describing the scope of the budget problem and desired dollar outcomes as goals. This is particularly important with regard to the rapidly growing interest costs.

    I have some specific differences regarding the constitutional amendment outlined. For example, I support putting a debt ceiling provision in such an amendment. On the other hand, the recommendations for a transition to balance and getting away from an annual requirement for balance (with exceptions) is quite sound.

    The only other specific recommendation I have is to think about the kinds of external pressure that can usefully be put on the federal government to address the debt issue. For example, this could come, and eventually will come, from the investors in Treasury securities.

    All in all, this is a very good job here.

    Reply

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