Monday, April 23, 2012

Balanced Budget Blunder

I, and I assume a lot of other state legislators, have been getting a slew of emails lately from an outfit called the Balanced Budget Amendment Taskforce.  What these folks want is for state legislatures around the country to call for a national convention to amend the United States Constitution to require that the Federal budget be balanced.  It takes 34 states to call a convention to amend, and it’s never happened so far, so the Taskforce has its work cut out for it.  And we’d better hope that it falls flat on its face, because requiring the budget to be balanced on an annual basis is really not a good idea.

I don’t mean by that that we should ignore large deficits or unbridled growth in the national debt. But when debt hawks throw around the big, scary numbers, it’s important to keep things in perspective. So consider, for example, the startling fact that between 1945, as WW II was ending, and 2011, the national debt held by the public grew by a factor of 43, from about $235.2 billion to $10.1 trillion! That sounds pretty bad, but it’s important to remember that in relation to the size of the economy, the national debt is smaller today than it was 67 years ago.*  

The chart below shows the Federal debt held by the public as a percentage of GDP over those 67 years. What it shows is that during most of the post WW II era, the Federal government has been able to reduce its indebtedness. The chart also shows that despite that long term trend, the debt has risen sharply since the Great Recession, although the increase really started in 2000, when George Bush took office. But that has happened before.  During the Reagan and first Bush administrations, the debt grew from 25% to 50% of GDP.  But then it fell, to 33%, during Bill Clinton’s presidency. The point is that while we should be concerned about the growth of the debt, history indicates that we we’ve been able to keep that growth under control. And we haven’t needed a balanced budget amendment to do it. 

But so what? Isn’t balancing the budget a good idea anyway?  How can we possibly benefit from running a deficit? Well, take a look at the next chart. It shows Federal government revenues and outlays from 2000 to 2011.**  You can see that Federal revenues (the blue line) are pretty sensitive to the level of economic activity: with the recession of 2001 revenues fell somewhat (although the much discussed Bush tax cuts had something to do with it as well) and during the Great Recession of 2007 they fell a lot.

During both these recessions, outlays (the red line) continued to rise. That increased  spending, which after 2009 was due in part to the ARRA stimulus plan,  meant that we began to run deficits. But more spending also kept the recessions from getting a lot deeper.  If the balanced budget amendment had been in place, expenditures would have had to fall, along with revenues, as the economy went south. The red line would have to lie on top of the blue line. Rather than increasing spending to buffer the downturn, the Federal government would have had to decrease it. And that would have made the downturn a lot worse.

Sound fiscal management means running deficits when necessary to stabilize the economy in the short run, but keeping the debt from outgrowing the economy and becoming unmanageable in the long run. Our experience since 1945 shows that it can be done. But not if the budget always has to be balanced.

However ill-advised it may be, don’t expect the movement calling for a balanced budget amendment to go away any time soon. For one thing, Steve Daines, the Republican frontrunner in the US House race, has endorsed the idea.  For another, ALEC, the outfit pushing conservative legislation in state houses all across the country, is apparently backing the amendment as well: it has published a handy-dandy guide for state legislators, penned by one-time UM Law School professor and conservative activist Rob Natelson, on how to draft convention call legislation.  And if ALEC likes it, there’s no doubt somebody will be giving it a whirl in the 2013 Legislature.

*  The numbers I cite here and used to prepare the first chart come from the Office of Management and Budget, Historical Tables, Table 7.1, ”National Debt at the End of Year: 1949-2017,“

** Data for the second chart comes from the same source, Table 1.3, ”Summary of Receipts, Outlays, and Surpluses and Deficits (-) in Current Dollars, Constant (FY 2005) Dollars, and as Percentages of GDP:1940-2017”