The GOP’s Latest Big Proposal Is a Gun Pointed at the Head of Our Economy
A balanced-budget amendment may be a convenient messaging tool. But it’s also terrible policy and a major fiscal threat.
When they return from recess, Congressional Republicans will reportedly vote on a balanced-budget amendment (BBA) to the Constitution—a law requiring that annual spending not exceed annual tax revenue. A BBA requires two-thirds majorities in both the House and the Senate, not to mention ratification by three-fourths of the states, so it’s highly unlikely to be legislated. But even though it is unlikely to pass, it represents a huge and present threat to those of us who recognize the need for an amply funded government. Here’s why.
Republican fiscal strategy has three goals: 1) cut taxes, especially for their wealthy donor base; 2) keep up the charade that they’re fiscally responsible; and above all, 3) significantly cut the social insurance programs that comprise the lion’s share of the government’s mandatory spending: Social Security, Medicare, Medicaid, and SNAP (food stamps).
They’ve achieved goal No. 1, though they’re predictably talking about going back to that well. Doing so raises the stakes for goal No. 2, which is where the BBA comes in. As for No. 3, both actions—tax cuts and the pursuit of the BBA—are key parts of attaining that goal, as I’ll explain.
But first, let us count the ways in which the BBA is a terrible idea. One of the most important attributes of federal fiscal policy, especially in periods of economic weakness, is the ability for the federal government to spend more than it takes in. Consider the way unemployment insurance or nutritional support ramps up when the economy ramps down. Such “counter-cyclical” fiscal policy would be disallowed under a BBA.
The ability to run larger deficits in weak economies is an especially valuable fiscal tool when you consider that states must balance their budgets. In the depths of the Great Recession, when I was working for the Obama administration and tracking the impact of our anti-recessionary measures, I vividly recall how states were forced to cut spending and lay off workers, which exacerbated the downturn. State fiscal relief—resources that quickly flowed to the states from the feds—turned out to be among the most potent policies we implemented. Simply put, during a recession, the ship of state is taking on water and the only guy with a bucket is Uncle Sam. A BBA would take away this bucket too.
But it gets even worse. Under a BBA, as budget analyst Richard Kogan points out in a must read recent analysis, Social Security and Medicare benefits could not be paid out of their trust funds unless the government accounts are in surplus, a rare occurrence. That’s because outlays in a given year, from whatever source, cannot exceed tax receipts. Nor, as Kogan stresses, could the government offset a financial collapse or the loss of bank deposits or guaranteed private pensions, even though both are insured by government agencies with reserves on hand.
The amendment does build in a waiver process, for, potentially, these types of developments. But waiving the BBA calls for a supermajority in both chambers, and I do not for a moment trust Congress to act quickly, if at all, when deficit spending is needed to avoid unnecessary economic pain. That’s why most anti-recessionary programs are set up as “automatic stabilizers:” they kick in based on need, not politics.
You might be asking: How can the same group that just recently voted for trillions of dollars in a deficit-financed tax cut now call for a BBA?
Easy. They’re not real deficit hawks. They’re deficit chicken hawks. The BBA is largely a show vote, much like the dozens they took on repealing Obamacare. It’s a signal to constituents that they truly do long to cease their fiscal recklessness, but simply can’t because those profligate BBA opponents refuse to provide them with the only thing that will stop their endless deficit spending: the fiscal handcuffs of a BBA.
But it’s not just for show. Consider that even with the White House and Congressional majorities, Republicans have been unable to cut entitlements. They haven’t even been able to cut their primary targets in this space: Medicaid or SNAP. So, instead of directly legislating such cuts, they’re trying to come around the back, by starving the government of revenues while touting the virtues of balanced budgets.
It’s a simple recipe: aggressively reduce taxes—especially for the wealthy—while ensuring that tax increases can never be entertained, thus resulting in rising deficits. Then, rend your garments in despair and shout about the need for balanced budgets (while ignoring that your phony growth predictions once again failed to materialize). And since you’ve taken new revenues off the table, there’s only one way to get there: Shrink the government.
How’s that working out? Actually, not so well. For this year and next year, the tax law adds over $400 billion to the deficit, about two percent of GDP. But the spending deal passed last month adds over another percentage point (about $250 billion).
In other words, the plot to cut spending isn’t working. And that’s where the BBA comes in. The Republican Party’s message—"we can’t stop spending without it!”—is true. In fact, it’s worse: “who’s up for tax cuts, round two?!”
And this, I fear, is where we’re stuck for the foreseeable fiscal future. Republicans will try to keep cutting taxes, as that’s key to rewarding their donors and shrinking government. Both sides will keep raising spending because there’s apparently no political or economic cost of doing so.
Until there is.
It is extremely likely that we’ll head into the next downturn with higher deficits and debt than in any recession since the 1940s (when WWII inflated the national debt). It is equally likely that this will give conservatives the same rationale to not respond to the recession that they’d get from a BBA. They’ll point to the elevated deficit and debt, ignore their own roll in its elevation, and essentially argue, “we’d love to help, but our hands are tied. We simply can’t afford to spend any more.”
In fact, as long as there’s no BBA, their hands won’t be tied, but the result could be the same: the implementation of austere, damaging, and unnecessarily painful fiscal policy at precisely the wrong economic moment.
Jared Bernstein is a senior fellow at the Center for Budget and Policy Priorities. He was chief economist for Vice President Joe Biden and a member of the Obama economics team.