Conservatives’ misguided efforts to limit federal budget deficits through some variation of a balanced budget amendment to the constitution has popped back into public discourse—this time in a New York Times op-ed by Glenn Hubbard, the dean of Columbia Business School and recently an economic adviser to Mitt Romney, and Tim Kane, chief economist of the Hudson Institute.
Balanced budget amendments (BBAs) are a terrible policy idea. Macroeconomic and political critiques have repeatedly hashed out the fundamental problems of such plans—most recently in 2011, when the House of Representatives fell 23 votes shy of the two-thirds majority required to pass a BBA sponsored by Rep. Bob Goodlatte (R-VA). See this paper by Robert Greenstein and Richard Kogan of the Center on Budget and Policy Priorities for a broad overview of why a BBA is intrinsically ill advised, or this paper co-authored with Ethan Pollack and Rebecca Thiess of the Economic Policy Institute detailing the folly of a slew of BBA and related proposals from 2011.
These critiques broadly apply to the Hubbard and Kane proposal, but further comment is merited on their flawed argument. First, their overarching political economy premise is bunk on all three counts. Second, heightened political dysfunction makes a much stronger case against the reasonableness seemingly lent by the “emergency” exemption in their proposal (that Congress will responsibly override a BBA when objectively appropriate).
Hubbard and Kane were essentially arguing that a BBA is now needed because, “Conservatives were wrong—not in beliefs that higher marginal tax rates harm growth, not that debt is dangerous, but about strategy. The beast was not starved.”
Translated, the supply-side crusade to cut taxes (particularly lowering top tax rates) was good for growth, but eroding the tax base was supposed to produce a greater erosion of public goods and services—laced with an intellectually incoherent pinch of debt fear-mongering. All three points are off base, particularly in the current economic context:
- Tax Rates: Enthusiasm for lowering marginal tax rates is largely based on the false idea that lower rates are a powerful spur to economic growth. Recent research on behavioral responses to taxation, as well as historical and cross-country regression analyses of top tax rates and macroeconomic performance, strongly suggest that these growth effects are substantially overstated. Analyses of top U.S. tax rate changes since World War II show that higher rates have had no statistically significant impact on factors driving economic growth—private saving, investment levels, labor participation rates, and labor productivity—nor on overall economic growth rates. See this EPI-TCF paper for a summary of this body of research.
- Debt: Blanket condemnations of debt as immoral or dangerous are nonsensical. While gambling on credit at a casino is foolish, as the expected rate of return is negative, debt can be productively employed to defeat fascism or finance an education that yields a high rate of return. And in the current economic context, there is no credible case against incurring public debt to stave off a deeper depression and spur economy recovery—Brad DeLong and Larry Summers convincingly argue it pays a long-term fiscal dividend. Inserting “debt is dangerous” between slashing taxes and starving the beast is also illogical: if the budgetary objective behind cutting taxes by a dollar is eventually forcing spending to be cut by a dollar, public debt will rise if there’s any lag or a match that is less than one-to-one.
- Starving the Beast: Anti-tax lobbyist Grover Norquist has yet to realize his dream of drowning the government in a bathtub, but regrettably, the Bush-era tax cuts started taking a toll on discretionary spending in the 112th Congress. During the George W. Bush administration, the 2001, 2003, and several smaller subsequent tax cuts were entirely deficit-financed. Hubbard and Kane have a valid criticism of the Bush administration for simultaneously increasing spending, most notably on the Department of Defense and the Medicare Part D prescription drug expansion, again all deficit-financed. But more recently, Congress enacted an $858 billion deficit-financed package of mostly tax cuts in December 2010—and over half of which was a two-year extension of the Bush tax cuts ($364 billion for 2001 and 2003 income tax cuts, $68 billion for estate tax cuts, and at least another $50 billion from interaction effects with the alternative minimum tax patch). This markedly increased borrowing needs for 2011–2012. In the summer of 2011, a necessary $2.1 trillion increase in the statutory debt ceiling (inflated by this package and essentially spanning the same period) was hijacked and ransomed for spending cuts. Coupled with about $500 billion in spending cuts from continuing resolution fights earlier in 2011, non-interest government spending was cut by $2.4 trillion over fiscal 2013-2022 in the 112th Congress. The Bush tax cuts were finally in part being paid for with government spending cuts.
So their premise for why conservatives need to replace “starving the beast” by slashing taxes with euphemistically “balancing the beast” using a BBA is entirely off base. The argument following that premise further misses the reality that Republicans in the House are perennially (e.g., Rep. Goodlatte) proposing variations of BBAs and global spending caps (i.e., fixing outlays as a share of GDP instead of pegging them to revenue). Both in rhetoric and legislative attempts, this has been a two-pronged attack on social insurance and public investment for quite some time; cutting taxes is simply easier legislatively because of broader appeal across the aisle and by the very nature of amending the constitution.
But the case for a BBA is even rockier today than it was in 2011. Consider that while 112th Congress was a train wreck—the U.S. credit rating was ransomed for austerity that’s pushing us further into depression—Congress is objectively a less functional entity today, thanks entirely to the far Right. The Republican Party cannot accept funding levels at, below, or above the sequestration cut levels that they demanded. Speaker of the House John Boehner and Senate Majority Leader Mitch McConnell have lost whatever semblance of control they had over their respective caucuses in 2011.
This depressing state of political reality is of the utmost importance for the third and final prong of the BBA proposed by Hubbard and Kane; “there should be an exception to the spending constraint for national emergencies.” But when the stakes are highest, Congress frequently can’t find agreement—on a bipartisan basis, let alone a bicameral basis, let alone a unified party basis within one chamber.
What constitutes an emergency routinely falls into this camp of highly politicized disagreement. The Merriam-Webster Dictionary offers the following definition: “1) an unforeseen combination of circumstances or the resulting state that calls for immediate action; 2) an urgent need for assistance or relief <the governor declared a state of emergency after the flood>.” Enter Congress:
- Disaster relief for Hurricane Sandy is about as clear-cut a case fitting the aforementioned definition imaginable, certainly in the last year. But federal aid was stymied for about two months (and the eventual package pared somewhat back) because of Republican objections to an “emergency designation” waving offsets and, more generally, opposition to government spending as well as (delusional and myopic) views regarding fiscal federalism and risk sharing.
- Most economists and the Bureau of Labor Statistics data will tell you the U.S. labor market is facing a severe long-term unemployment crisis, with by far the highest rates of prolonged unemployment since data collection started in 1948. Congressional Democrats overwhelmingly seem to share this view and have repeatedly fought for emergency assistance for the long-term unemployed. But Republican Senators see it differently, and have chronically filibustered extensions of emergency unemployment benefits since early 2010—succeeding in paring the program back from providing up to 99 weeks of benefits to 73 week in 2012. And emergency unemployment benefits’ continuation beyond 2013 seems highly unlikely despite almost certain need to be reflected in forthcoming data.
- More broadly, the U.S. economy is deeply demand-depressed and faces a jobs crisis—an emergency through the lens of the Congressional Progressive Caucus’s Back to Work budget alternative for fiscal year 2014. Yet their evidence-based diagnosis and policy proposals are diametrically opposed to the House Budget Committee Paul Ryan’s austerity budget, which takes the opinion that the emergency is too much government spending, particularly in the provision of health care (hence trying to privatize Medicare, halve Medicaid, and repeal the provisions of the Affordable Care Act expanding coverage).
- Annual appropriations for overseas wars are a hard sell for the aforementioned definition of “emergency,” certainly since the second term of the Bush administration, as the circumstances of deployments in Afghanistan (and until recently Iraq) have been eminently foreseeable, and classification as “assistance or relief” is, at minimum, highly debatable. Yet Congress has continuously funded these wars with “emergency” designated supplemental appropriations bills circumventing offsets and procedural rules (e.g., statutory pay-as-you-go rules).
Anyone proposing a binding fiscal rule while claiming Congress will responsibly override said rule, in a timely fashion, when it’s objectively inappropriate, has blinders on and is preaching economic malpractice. A BBA would be terrible policy, especially in the current context of depression and political dysfunction. Thankfully, Hubbard and Kane made a terrible pitch for one—and the Constitution makes it harder than they suggest.