A Balanced Budget Amendment to the Constitution
If we were to pass a balanced-budget amendment to the Constitution (“BBA”), the federal debt would still go up each year. Congress has a bagful of tricks that it uses to skirt any form of discipline, from “off-budget” spending to the cleverness of the “Unified Budget” (which effectively seized the funds in the Social Security Trust Fund). Still, the discipline created by a BBA would be a good thing. A Congress that doesn’t have to struggle a bit to “balance” its budget is a Congress that doesn’t have a budget process at all. Legislators are supposed to make difficult choices among competing spending programs.
So we were pleased to see an opinion piece about balanced-budget amendments in the Wall Street Journal, and wrote a letter to the WSJ to clarify a point, and expand a bit. The editors published the letter:
Buy Now, Pay Later Philosophy Means Debt
We cannot be great if we go broke.
Jan. 22, 2019 6:33 p.m. ET
In their call for a balanced-budget amendment to the Constitution, Profs. Hanke and Walters imply that, while the measure almost succeeded in Congress in 1982, it hasn’t had similar success since. In fact, a similar measure flew through the House in 1995 with 300 bipartisan votes in favor and then narrowly failed in the Senate. A March 3, 1995, New York Times article says: “The actual vote was 65 to 35, with Senator Bob Dole, the Republican leader, casting a vote against the amendment, but only as a parliamentary dodge. By aligning himself with the winning side, he won the right under Senate rules to bring the amendment back to the floor later, something he has pledged to do.”
There was another near win in 1997, and since then the House has passed balanced-budget amendments several times. When millennials realize they won’t receive the benefits enjoyed by today’s elderly, they might decide that they’re not going to pay for them.
John Lumbard, CFA
The Op-Ed itself:
Margaret Thatcher famously said the problem with socialism is that you “always run out of other people’s money.” The trouble with resisting socialism is that until the money runs out, free-spending progressive policies are remarkably seductive. Their appeal comes from what economists call lying prices: advertised prices that don’t reflect the full cost of what you’re buying.
When prices lie, people make bad choices—especially when they think something is free. Take rush-hour commutes. We jump in our cars hoping for a quick trip only to find the streets clogged; with access priced at zero, demand exceeds supply. Absent a price signal to encourage carpooling or other alternatives, we creep, beep and waste huge amounts of time and fuel. Transportation consulting firm Inrix tallied up the cost of this waste in a study last year, calculating that $305 billion of value was burned in traffic across the U.S. in 2016, with the typical Los Angeleno wasting more than $2,800.
For many politicians, lying prices are actually a goal. Policies that set dishonest prices or fudge budgets can fuel the growth of government and lure voters leftward. Sen. Bernie Sanders and his socialist followers use such sleight of hand to obscure the vast costs of proposals for “free college” and “Medicare for all.”
Recent history demonstrates that the price of each new government program rarely tells the whole story. In the past decade taxpayers were charged $27.2 trillion for federal services that cost $35.6 trillion, adding more than $9 trillion to the national debt. Our tax bills told us that Uncle Sam’s good works were about 26% cheaper than their real cost.
And Sam’s nose is growing thanks to rising deficit projections and the unfunded future costs of entitlements like Social Security and Medicare. Official projections put the present value of these two unfunded liabilities at $50 trillion over the next 75 years. Boston University economist Laurence Kotlikoff calculates that the total U.S. fiscal gap is more than four times that amount and that closing it would require a tax hike of more than 60%.
Many Americans pay a minimal share of even the apparent cost of government, so it’s no surprise that socialist ideas are becoming more popular. Big government looks like a bargain. Escalating debt will bring predictable consequences, which include crushing interest payments that crowd out other spending and misallocation of capital, which saps productivity. Yet most politicians continue to put voters at ease by advertising lying prices for current and future spending. Even many Republicans seem content to pile on debt and spend their children’s money. How’s that for “taxation without representation”?
Is there a way out of this moral and fiscal quagmire? In the 1980s Milton Friedman championed a balanced-budget amendment to the Constitution. One version passed overwhelmingly in the Senate in 1982 but failed to secure the necessary two-thirds majority in the House. That was as close as Friedman’s dream would get to reality. Economists John Merrifield and Barry Poulson have called for a limited constitutional convention to propose a balanced-budget amendment. Twenty-eight states have standing calls for such a convention—six shy of the needed 34.
It’s tempting to think that such an amendment would make an honest republic of us and deprive the spreading socialist grass fire of oxygen. Politicians seeking Medicare for all, free college, subsidized housing and guaranteed jobs would be forced to convince taxpayers to pony up $40 trillion according to the Center on Budget and Policy Priorities. Good luck with that. “Free” sells itself, but honest prices get a hard look.
Yet even if an amendment was ratified—which would require the assent of 38 state legislatures—it wouldn’t be enough to assure honest pricing of government. Current unfunded liabilities show how skilled politicians and bureaucrats have become in lying “off the books.”
It is foolish to hope that the Democratic Party will join in reversing this trend any time soon. As it has moved left, it has embraced ever more deceptive prices for reforms to government services, labor (Fight for $15!), health care, higher ed, housing and much else.
This is a cynical strategy, and it creates a dangerous political feedback loop. First, progressive thinking leads to bigger, debt-financed government. But debt-financed government, and the lying prices it embodies, also can lead to more progressive thinking. Absent honest signals about government’s full costs, more voters are likely to shrug and assume it’s a good buy.
The late economist William Niskanen documented the relationship between deficits and spending, showing that attempts to “starve the beast” of big government via tax cuts don’t work: As tax receipts decrease, spending rises. In his words, “a tolerance for deficits leads to increased government spending.” Polls confirm this trend. Since 2011 the proportion of voters who worry “a great deal” about federal spending and deficits has fallen from 64% to 51%, while the national debt has risen 45%.
Mr. Hanke is a professor of applied economics at the Johns Hopkins University. Mr. Walters is a professor of economics at Loyola University Maryland.
Appeared in the January 8, 2019, print edition.