The Best Type of Balanced Budget Amendment

Balanced Budget Amendment EXPLAINED

The United States is 30 trillion dollars in debt! We have more debt relative to our GDP than at any other point in our history!1 And so we need to fix this sinking ship or else America will go down under the weight of her debt obligations!

One tool that will help us reduce our debt addiction is a Balanced Budget Amendment…

Research shows that balanced budget amendments lead to greater fiscal discipline. — University of Chicago Journal2

46 out of 50 states have some form of a Balanced Budget Requirement (BBR)3 and many countries have one too such as Germany, Italy, Poland, Slovenia, Spain, and Switzerland.

Regardless of your political affiliation, I believe we should all support a Balanced Budget Amendment, but the more difficult question is… What’s the best type of balanced budget amendment? Not all balanced budget amendments are created equal!

Balanced Budget Amendments exist on a spectrum from lenient to strict so let’s explore the multitude of factors that go into making a Balanced Budget Amendment so we can design the best one for ‘Merica…

Balanced Budget Amendment Specifications

First, should our Balanced Budget Amendment be a constitutional amendment or a statutory provision? A statutory provision could easily be overridden by a simple majority vote therefore to increase the constraining power of our balanced budget requirement I think it should be a constitutional amendment. Virtually every state has their BBR as a BBA.

Second, should our Balanced Budget Amendment force the budget to be balanced on a yearly or a cyclical basis? A few nations in Europe have a cyclical BBR. The advantage of a cyclical BBR is it’s easier to predict government revenue over a business cycle rather than over the course of a year, but the problem is it’s also easier to game because of its increased complexity.4 For example, in 2005 the UK Treasury revised its national account data, which shifted their previous business cycle’s start from 1999 to 1997.

Every state in the US has its BBR on a yearly basis and so in the name of simplicity and Americana I believe our federal government’s should be yearly too.

Third, should our Balanced Budget Amendment include the whole budget or should certain programs be exempt? The 1995 Balanced Budget Amendment5 lost by just two votes in the Senate because it didn’t exempt Social Security.6 Ideally, though, no program should be exempt because politicians could move funds to get around the requirement like a mobster washing his money through the laundromat. If a program is worthy, which I believe Social Security is, then it should be worthy enough to be accounted for. With that said, we shouldn’t let purity stop progress. Let’s not die again on this hill! After all, on the state level, “capital and pension funds are usually exempt from BBR limitations.” And since 1995, our Social Security trust fund has almost been depleted anyway so it’s not like there’s much money to withdraw. Plus, any politician that would suggest doing so would quickly find themselves living off of Social Security as they’d be put in permanent political retirement.

Fourth, should our BBA only require that a balanced budget be proposed or does one also have to be signed? And does it merely have to be planned at the start of the year or does it have to also be balanced by the end of the year? In some states,7 the legislature merely has to propose a balanced budget, but in the end, the governor could sign one that’s unbalanced. In order to reduce gaming and discourage overestimating revenues & underestimating expenditures,8 our federal budget should not only be balanced at the beginning but also in the end. 38 states require both.

Fifth, how big of a supermajority should legislators need to override the balanced budget requirement: three-fifths (60%), two-thirds (66.67...%), or three-quarters (75%)? The 1995 BBA would have required a three-fifths supermajority, which is a good compromise between not being too lenient or too strict. A super strict BBR could make recessions worse by forcing governments to make cuts or increase taxes at a time when money is already tight. The goal of a BBR isn’t to make deficit spending impossible, but to make it harder. A BBR serves as a North Star so that when our Ship of State veers off to avoid a storm it can ultimately get back on course.

Sixth, should there be exceptions to the 60% override in the case of war, recession, or a national emergency? No. Opportunistic politicians could too easily declare war on some small country or even on an abstract cause like “terrorism” or “climate change.” They could also declare a recession at the slightest economic downturn or based on a single economic indicator and they could declare a “national emergency” on basically any issue their base cares about from a “border emergency” to an “inequality emergency!”

Don’t get me wrong — I support deficit spending during a genuine war, recession, or emergency — but if it’s genuine then a 60% override isn’t a steep hill to climb as evidenced by the bipartisan supermajority support for such deficit-inducing policies as… The Authorization for Use of Military Force of 2001, Operation Iraqi Freedom, American Recovery and Reinvestment Act of 2009, the CARES Act, and the 2021 Consolidated Appropriations Act.

And finally, should our BBA include a “rainy day fund”? The best BBR’s include a rainy day fund in order to help us weather any unexpected dips in the economy. Every year a certain percentage of revenue should automatically go into this stabilization rainy day fund. The RDF should also have a cap because it helps prevent an “unnecessary build-up of restricted funds.”41 states cap their RDF. A typical cap is 5% of total expenditures or revenues, but since the Great Recession was able to exhaust a large portion of state reserves it’d probably be wiser to have an even larger cap on the federal level at around 7%.

After the last three recessions, states were able to gradually build back up their RDF each time in preparation for the next inevitable recession…

In my opinion, an RDF + 60% override help negate Keynesian concerns. During a recession, most conservatives believe in stabilizing the economy so it wouldn’t be difficult to get conservatives to support temporary deficit-spending, but with that said, better than deficit spending during a recession would be surplus spending! With a robust RDF, there’d be less of a need to borrow against our tomorrows, which would put us in the strongest macroeconomic position!

To preserve our independence we must not let our rulers load us with perpetual debt. — Thomas Jefferson

In conclusion, I’d be happy with virtually any BBA given our status quo because it’d at least give politicians constitutional cover when they make unpopular spending cuts or tax hikes, but I believe the most sensible BBA is one that would be yearly, 60% supermajority override, and contain a robust rainy day fund. 

A Balanced Budget Amendment is needed now more than ever because the United States has more debt than any other nation on Earth and at any other point in our history both in real-terms and debt-to-GDP ratio: 136% and growing!9

This is extremely extremely EXTREMELY alarming! According to a paper, Growth in a Time of Debt by Harvard Professors Reinhart and Rotoff — whose conclusions have been confirmed by the IMF and other economists — governments whose debt exceeded 90% GDP experienced a slower rate of growth than less-indebted countries!10

In the end, rising debt will eventually destroy America’s ability to grow itself and therefore defend itself much like it's done to numerous countries in the past from Rome to France, Germany to Japan. In addition to being economically short-sighted and geopolitically self-destructive, it’s morally irresponsible for our generation to push our debt onto the next generation. Let us take responsibility for our great country by standing up for what’s right and sensible! 

Let America lead the world again as an example of what good governance looks like! And then when we finally balance our books, we’ll go down in the history books as the generation who plugged its holes, broke through the storm, and made our Ship of State faster, stronger, and more perfect than ever before.

Full steam ahead!

Thanks for reading! You can watch the video essay version here.


Personal Update

I hope you enjoyed that essay! It took me a long time to research and think through. It’s also very important for people to get their minds around the national debt because unfortunately in our political environment people think too much in terms of monopoly money. What is $1 trillion? Or $10 trillion? Or $50 trillion? But once we appreciate the importance of balancing the federal budget then it pulls people more toward a reasonable position about how high taxes and spending should be.

Something I didn’t mention above is that about 10% of federal revenue goes toward paying interest on the national debt. That means instead of going toward education or healthcare or a massive tax cut… $300 billion is just going toward interest payments!11 The national debt already affects you today, but if we don’t become more fiscally responsible then the future looks even bleaker because in the next 35 years interest payments are projected to consume 50% of federal revenue. Insane!

Anyway, I hope you are well. I have a lot coming down the pipeline. One of my primary focuses this past week has been building out and designing this little nifty subreddit r/reasonrising. If you’re on Reddit check it out! Have a great week!

1

https://www.visualcapitalist.com/americas-debt-27-trillion-and-counting/#:~:text=Since%202008,%20America's%20national%20debt,trillion%20as%20of%20October%202020.

2

https://www.journals.uchicago.edu/doi/10.1086/707618

3

https://www.urban.org/research/publication/balanced-budget-requirements

4

https://www.imf.org/external/pubs/ft/wp/2007/wp07199.pdf

5

https://www.congress.gov/bill/104th-congress/house-joint-resolution/1

6

https://www.latimes.com/archives/la-xpm-1995-03-03-mn-38285-story.html

7

https://www.taxpolicycenter.org/briefing-book/what-are-state-balanced-budget-requirements-and-how-do-they-work

8

https://www.nber.org/system/files/working_papers/w5838/w5838.pdf

9

https://www.thebalance.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287

10

https://www.bushcenter.org/catalyst/federal-debt/clark-national-debt-through-history.html

11

https://www.crfb.org/papers/how-high-are-federal-interest-payments