Should the Senate Pass a Balanced Budget Amendment to the U.S. Constitution?

Martin A. Regalia

[Reprinted from "Reducing the Deficit: The Ongoing Balanced Budget Debate,"
Congressional Digest, vol. 76, no. 3 (March 1997)]

The [U.S.] Chamber [of Commerce] strongly supports a balanced budget amendment to the Constitution. Our members and their employees... have long felt the effects of Federal fiscal mismanagement. Large, persistent Federal deficits reduce saving and investment, stymie income and job growth, and reduce our standard of living. They ultimately lead to increased taxes, bigger government, and higher interest rates, all of which reduce the global competitiveness of U.S. firms.

The balanced budget amendment would prohibit Federal outlays from exceeding revenues, unless Congress approved a deficit by a three-fifths vote of both the Senate and House. The amendment would require the same three-fifths vote to increase the Federal debt limit and would require a "constitutional majority" - 51 votes in the Senate and 218 in the House - to raise Federal taxes.

The Chamber is convinced that the balanced budget amendment will place renewed emphasis on fiscal discipline, forcing Congress to slow government spending while constraining its ability to raise taxes. In restoring the proper balance between spending and taxes, the balanced budget amendment also would force government officials to prioritize difficult spending choices.

The balanced budget amendment has been challenged on various grounds. Including its economic effects, its appropriateness for the Constitution, and the contention that it would needlessly involve the court system in its enforcement. I would like to address each of these issues, and share with the committee the conclusions reached by the Chamber.

Critics of the balanced budget amendment contend that the negative effects of deficits are overblown, that deficits really do not matter. Others admit to some of the negative effects, but point to recent "improvements" in the deficit, claiming that we have adequately addressed the problem. Still others acknowledge the serious long-term ramifications of deficits, but claim that correcting this situation carries too high a social and political price.

Chronic government deficits, and the resulting accumulation of government debt, reduce the level of savings and investment, lower productivity growth, raise the specter of inflation, put upward pressure on interest rates, encourage trade deficits, and lower our standard of living.

Since the 1960s, we have seen the net national savings fall from about 10 percent of GDP [Gross Domestic Product] to consistently below 4 percent - too low to support the investment required for high productivity growth. Because long-term productivity growth is the key to rising standards of living, skimping on investment is dangerous.

First, chronic government borrowing tends to put upward pressure on interest rates. Businesses seeking to raise capital and households applying for mortgages have to compete with the Federal Government in securing loanable funds. This increase in demand pushes interest rates up. Consequently, fewer loans are made to the private sector, and those that are made carry a higher interest rate. This is known as "crowding out," since government borrowing displaces some private borrowing.

Second, because our economy is increasingly linked to the global market, there are important international impacts related to the budget deficit. Higher interest rates tend to precipitate an overvalued dollar, meaning that our goods and services cost more to our trading partners. This lowers our exports and pushes up our trade deficit. Many contend that one of the major forces behind the huge trade deficits of the 1980s was the Federal budget deficit.

Third, the amount we are paying to service our national debt has grown since 1969 - from $43 billion to $240 billion in 1996. As a share of total government outlays, interest payments on the debt have more than doubled, from about 7 percent during the early 1970s to over 15 percent currently. That means that for the same amount of revenue there is less money for other government programs, whether for national defense, our court system, Head Start, or environmental clean-up. No matter what the budget priorities are, fewer funds are available.

Large persistent deficits and the accumulation of debt can also have severe consequences for future generations. To the extent that government debt is held by foreigners - currently about 15 percent - there will be a net transfer from these future generations to foreign bond holders to service or retire the debt. Even more important, shifting funds from current private savings and investment to current government consumption via government deficits can leave future generations with inadequate investment, sluggish productivity growth, poor, wage growth, and lower living standards.

Some critics charge that these negative effects of government are largely overblown and that much government spending is really investment. Some government spending can be regarded as "investment spending," meaning that funds spent now will generate stronger economic growth later. Spending on infrastructure-highways, bridges, dams, and mass transit, for example - and other programs such as education are often thought of that way because they provide benefits over a longer period of time. But the bulk of government spending goes to projects and programs that instead represent "current consumption." While many of these programs are desirable, we need to recognize that we should pay for them out of current income.

Many critics of the balanced budget amendment will acknowledge the problem but claim that such a "drastic" solution is unnecessary. They point to the 1993 OBRA [Omnibus Budget Reconciliation Act] legislation and recent deficit reduction as evidence that we have solved the problem. Unfortunately, this is an extreme form of denial. We need only look to history and current CBO [Congressional Budget Office] projections to see the fallacy in this argument.

Until about 1960 or so, running a balanced budget over time was an "unwritten" constitutional amendment. The U.S. government ran deficits during the War of 1812, the severe recession of 1837-43, the Civil War, and the Spanish-American War, to name a few episodes. But in other periods, the Federal Government ran surpluses to reduce its outstanding debt. On the whole, only emergencies justified running a deficit.

But since 1960, this informal rule apparently has gone by the wayside. In the past 36 years, the United States has avoided a deficit only once, when in 1969 there was a surplus of $3 billion. Given the chronic deficits we have grown to expect, it is time to make explicit through a constitutional amendment the old implicit principle of government living within its means.

While it is true that a combination of factors has lowered the current deficit, the impact is likely to be transitory. The Congressional Budget Office estimates that after bottoming out in 1966, the deficit will begin to rise once again both in absolute terms and as a percentage of GDP. What is even more discouraging is that despite all the rhetoric, neither the Congress nor the Administration have been able to agree on a statutory plan to balance the budget.

Some commentators have argued that a balanced budget requirement is a mere rule of accounting, incompatible with the broad principles in the Constitution. It is worth noting that the Constitution already contains several narrowly focused economic and fiscal provisions, including the Article I, Section 9 requirement of "a regular statement and account of the receipts and expenditures of all public money" and the Article I, Section 8 requirement that "duties, imports and excises . . . [be] uniform throughout the United States."

Moreover, the balanced budget amendment embodies two principal themes of the Constitution: limitation on Federal power, and protection of politically under-represented groups against majoritarian abuse. Thomas Jefferson, who perceived the inherent expansionist tendency of central government, supported a constitutional prohibition of Federal borrowing as a means of protecting individual liberty.

As I noted earlier, our Federal Government embraced the practice of holding government spending in check to avoid deficits, except during war or recession. In recent times, the erosion of this principle has created persistent structural deficits, removed the need to limit and prioritize programs, and led to an excessively large Federal sector. The balanced budget amendment requirement that Federal operations be funded from current revenues restores an important principle of fiscal responsibility and limited government.

Statutory attempts to impose fiscal discipline upon the Federal Government have failed, largely because Congress was able to change the rules in mid-game. The ambitious deficit-reduction targets of the 1985 Gramm-Rudman-Hollings law were repeatedly modified when they conflicted with Congress's spending ambitions. Likewise, big-ticket items such as unemployment compensation payments and disaster relief are customarily designated as "emergency" spending, which exempts them from spending caps. Between 1980 and 1990, each year's actual spending exceeded the targets of that year's budget resolution by an average of $30 billion (the excess was $85 billion in 1990).

Each statutory response to the deficit has shown the same vulnerability: hard-won budget rules can be waived or modified by a simply majority vote. Not surprisingly, a majority can usually be assembled to support more spending. The key advantage of a constitutional amendment is that tough budgetary rules can be placed beyond the reach of simple congressional majorities.

Some lawmakers and commentators have raised questions about the enforcement of a balanced budget amendment. A primary concern is that congressional efforts to meet the balanced budget requirement would be challenged in the courts, and the judiciary would be thrust into a nonjudicial role of weighing policy demands, slashing programs, and increasing taxes.

On the other hand, there is a legitimate and necessary role for the courts in ensuring compliance with the amendment. Congress could potentially circumvent balanced budget amendment requirements through unrealistic revenue estimates, emergency designations, off-budget accounts, unfunded mandates, and other gimmickry. It is our view that the need to proscribe judicial policymaking can be reconciled with a constructive role for the courts in maintaining the integrity of the balanced budget requirement.

In general, the courts have shown an unwillingness to interject themselves into the fray of budgetary politics. The New Jersey Supreme Court observed that "it is a rare case. .. in which the judiciary has any proper constitutional role in making budget allocation decisions." The judiciary has remained clear of most budget controversies.

A strong framework of accounting guidelines will emerge from implementing legislation. Supporters in both the House and Senate have indicated their intention that implementing legislation embrace stringent accounting standards that will minimize the potential for litigation. Should legitimate questions arise concerning the methods by which Congress balances the budget, these standards will also provide objective criteria which meet constitutional standards for judicial intervention.

The implementing package is also likely to establish guidelines for judicial involvement, defining those issues appropriate for litigation and which parties have standing to litigate them. State budget officers, for example, could be given standing to contest unfunded Federal mandates. These enforcement procedures, coupled with budget process and accounting guidelines, will operate against a backdrop of traditional legal principles to rationally limit judicial action. The effect should be to prevent judicial over-reaching into legislative functions, while providing a check on congressional attempts to evade the requirements of the balanced budget amendment through procedural and numerical gimmickry.