Sunday, August 7, 2011

Only politicians could write this balanced budget amendment

As it now stands the proposed balanced budget amendment is a mess and if enacted will create a mess that will lead to its repeal. Do I hear prohibition?
1. The proposal is that federal expenditures for the fiscal year not exceed revenues.
2. Federal spending is capped at 18 percent of GDP
3. The president must submit a balanced budget to congress each fiscal year
4. Taxes cannot be increased to balance a budget unless approved by three fourths of both houses of congress.
5. The provisions can be waived if approved by a three fourths vote of both houses.

Here are some immediate concerns:
1. How are the revenues determined? If it is based on a projection by CBO then since CBO usually gives scenarios such as “most likely” and “least likely” which is chosen? Also, economists predicting anything have a worse track record than weathermen. Wouldn’t it make more sense to base expenditures on the previous year’s revenues?
2. What happens if the budget is not balanced? Do the courts then step in to enforce the amendment? Do you really want judges involved?
3. I thought the constitution put the power of submitting a budget in the house of representatives? Why should the president be given the responsibility? The office of the president is probably the least able choice to submit a budget. What happens to all the congressional committees charged with deciding on the detailed line by line expenditures to each federal agency? It seems to me that the proposal should say that the congress must submit the balanced budget.
4. What happens if the president refuses to submit a budget? Is this an impeachable offense?
5. What happens if the congress refuses to accept the president's budget?
6. Although most of us agree that spending must be controlled, a limitation of 18 percent would be sufficient in and of itself. There are estimates that show that a cap of 18 percent would balance the budget all by itself in 10 years.
7. Lastly, as I have written before, the debt ceiling is an effective limiter of federal spending if it is adhered to. So why not simply make a raising of the debt ceiling subject to the three fourths majority?


JP said...

Very solid arguments. Thanks for the food for thought!

Anonymous said...

Dr. Black:
Would you mind answering a question for me? Many commentators(including former Fed Chairmen Greenspan) have recently argued that there is no risk of default on U.S. government debt, since we can always print more dollars to pay our debts. Therefore, the thinking goes, the S&P downgrade is not about the U.S. government's credit worthiness.
But is the Federal Reserve not independent? The Fed's mandate is to keep prices, interest rates, and employment stable, not bail out the Treasury. Are commentators just assuming the Fed will give up its independance? Secondly, even if the Fed would monetize the debt, would such action not call for a downgrade? There is a reason that investors prefer developing countries bonds to be denominated in dollars. Why do I want to invest in treasuries (at current rates) if I expect to be paid back in inflated dollars (above and beyond normal inflation)?

Thanks for your time,
Gregg Rader

H.A. Black said...

Good observations all. It is true that the Fed could just create the money. You are also correct. If there were a threat that they would do that which would seriously devalue the dollar, the US would find it difficult to sell Treasurys in the future. If you look at all the nation's that have actually defaulted, each re-negotiated their payment structure. Also each then issued more debt - investors obviously have a short memory! In the end, Japan is probably the best example of a basket case in that their debt is now only bought by the government's own pension funds.