As The Daily Caller reported on June 23, House Majority Leader Eric Cantor intends to let the House vote on a balanced budget amendment to the U.S. Constitution. The vote is scheduled for the week of July 25.
This will be one of the most important votes in many years in Congress. Its impact on the U.S. economy could exceed that of the Reagan tax reform. However, it is far from certain that the impact will be positive.
The bill that the House will vote on is Congressman Bob Goodlatte’s proposal, which made it out of the House Judiciary Committee on June 15. It has three parts:
a) Total federal spending may not exceed total federal receipts in any fiscal year;
b) Revenue-raising bills must have a three-fifths majority to pass;
c) Federal spending will be capped at 20 percent of America’s economic output.
Only the fiscally reckless will deny that federal spending is out of control. But before the House vote, members of Congress should consider four problems with the Goodlatte amendment. They are mostly related to the requirement that federal spending doesn’t exceed federal receipts.
1. The fiscal auto-pilot. Short-term changes to federal revenues and spending are almost always automatic. Tax revenues fall in a recession because fewer Americans work. Spending, by contrast, increases because of income-tied entitlements. In a recession, more people qualify for entitlements. How will members of Congress balance the budget in a recession? Will they summon a three-fifths majority and raise taxes? Or will they cut entitlement spending, and thereby default on entitlement promises to poor and low-income citizens?
2. The panic factor. Economists rarely make pin-point accurate predictions of recessions. How many foresaw the depth of the current recession? The Goodlatte amendment dictates that Congress must balance the budget every year, which means that when a recession opens, Congress will be forced to take panic-style action to avoid violating the Constitution. Is this a prudent way to handle the nation’s economic affairs?
3. Experience. Our states must balance their budgets, yet that has not prevented deficits. California is a case in point. Another example is the European Union. Its constitution mandates a balanced budget in every member state, yet some of them, spearheaded by Greece, have gaping holes in their budgets. Why will Congress be more successful at balancing a budget under the Goodlatte amendment than U.S. states and EU members have been under their balanced budget requirements?
4. Definitional problems. The Goodlatte amendment caps federal spending at one-fifth of the nation’s economic output. Assuming that economic output is measured as GDP, Congress is faced with a delicate problem: not all federal spending is measured in GDP. According to the Bureau of Economic Analysis, in 2010 the federal government only spent $1.2 trillion. Yet the budget that President Obama submitted for the fiscal year of 2010 was $3.7 trillion. The difference has to do with how national accounts define economic activity: only activity that pays for a good or a service counts toward GDP. Two-thirds of the federal budget does not: it consists of financial payments such as Social Security, welfare payments and aid to states. Putting such spending in the numerator and GDP in the denominator is a genuine apples-and-oranges operation.
Based on the numbers mentioned above, it is factually correct to argue that federal spending is less than nine percent of GDP. A slick statist could make the case that at such low levels of spending the Goodlatte amendment does not imply spending cuts to close a deficit.
The pending vote in the House ramps up the fight for limits on federal spending. That fight definitely deserves support. But the inclusion of a strict balancing requirement diverts focus from the real cause of the deficit: excessive spending.
A good outcome would be if the House rejected the first part of the Goodlatte amendment but adopted the other two. After all, big governments run big deficits. Small governments run small deficits. Minimal governments run…
Sven R. Larson is a research fellow with Wyoming Liberty Group, a free-market think tank. He has written two books and numerous research papers and articles about economic policy, state budgets, health reform and the welfare state. He is often interviewed by TV, radio and newspapers on his topics of expertise.