Oh, man. Bill Richardson just repeated his call for a Balanced Budget Amendment to the constitution. The audience, showing what I think is a pretty impressive level of knowledge of budget policy, erupted in boos. And rightly so. This is a terrible idea. Fortunately, Richardson's not going to be president, but imagine if we'd had such a thing in place during, say, the second world war. I dunno what Richardson thinks he's doing.
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Boo!
04 Aug 2007 02:23 pm
Comments (44)
I don't think we know if Richardson is endorsing the same language as the GOP bill from the 90s.
And even if that is the case, the idea is not awful per se. It's a worthwhile idea to legally guarantee that the government will not run up massive deficits when there is NOT a depression, as in right now. Maybe the American people would pay more attention to factual discourse on the war if they had to choose between the going to war or raising taxes or cutting spending.
I don't like how Richardson apes certain right-wing talking points either but dismissing this idea out of hand seems unfair.
As Ron says, almost every version of the balanced budget amendment has an escape clause, so suggesting it would have caused us to lose WWII shows a rather unimpressive level of knowledge by Matt here.
The reason it's a bad idea is that it limits the ability of the government to use spending in progressive directions.
Moreover, I think the question really should be why Democrats should exalt the fiscal policy of Eisenhower over that of FDR?
IIRC, some states have balanced budget amendments for most spending -- government employee salaries, etc. -- but still borrow money via muni bonds for capital expenditures (building infrastructure). That would be an interesting approach at the federal level.
Ron and Counterfactual are completely correct, and Michael Kinsley wrote an entire TRB column on the subject in TNR back in (I believe) 1992 -- pointing out that requiring a supermajority would simply serve as a counterweight to the natural temptation of politicians (especially in the Keynesian era) to say that it's ALWAYS the right time to run a deficit.
I still think a BBA is a near-necessity for the US at this point, and that Bill Clinton was a self-defeating cretin (not for the last time) to block it. Even though Congress and the White House would respond to it by immediately looking for one legal crack after another to slither through, at least the BBA would allow the courts to slow that process down.
1) Matthew's comment against the Balanced Budget Amendment was widely promoted in 1980 -- and we are now $8+ TRILLION deeper in debt.
2) Re Mr Attawell's comment the reason the Balanced Budget Amendment is a "bad idea is that it limits the ability of the government to use spending in progressive directions"
-- I would point out that we will shortly be $10 TRILLION in debt. Roughly $8 TRILLION of which was incurred by those strong progressives
Ronald Reagan, George H Bush, and George W Bush.
Maybe Mr Attawell can point to the "progressive programs" those Republican Presidents funded.
3) I would point out that roughly $4 Trillion of the debt consists of money STOLEN from the Social Security and Medicare Trust Funds. Most of it by the past Republican Congresses and George W Bush.
That doesn't sound very "Progressive" to me.
PS Al Gore TOLD YOU what George Bush was going to do back in 2000 --remember "George W Bush" talking about Al's "Fuzzy Math". Well, George W's latest Budget has a table in the back showing federal debt -- and the figure isn't very fuzzy.
As always, citations and references available on request.
I think the tacit assumption of a balanced budget amendment would be that it would prevent whatever party you are against from running amok if they get big congressional majorities. I don't think that's such a bad thing, myself-we may talk about how this might inhibit progressive initiatives, but this only gets said because it's assumed in the next election cycle that Dems will be in power. If you thought that the Republicans were going to clinch the election, wouldn't you want to have something working to keep them from pursuing Bush's ridiculous economic precedent? Besides, it seems the Dems will already be politically constrained-they will have to at least make an attempt to balance the budget if they wish to retain the hallowed mantle of the "party of fiscal responsibility". So, even in the near term, an amendment with appropriate caveats couldn't hurt the progressive cause too much, since they are going to have to try budget balancing anyway, and the benefit-of constraining the conservative habit of bloating the defense industry beast whenever possible, and finding new and unusual ways to ease the horrendous tax burden posed upon the upper class (those poor rich people), I think would be worth the trade off. It also seems to be as intelligent a way as any to recognize that deficit spending represents a de facto tax upon the electorate, an unsigned check that is going to have to be cashed one day, and that it should only be in the direst of situations that we are allowed to justify imposing a financial burden of this kind upon our future selves.
Ah yes, the second world war, the good war. Not like that bad war we have now. Those were the good old days. Unless you were in it rather than merely paying for it or, currently, exalting it.
Most of what needed to be said has already been said, but simply put:
1. The issue of war is a canard-- you can just put in a provision allowing the amendment to be waived in case of war. (You can even counteract recent history by limiting it to declared wars, thereby forcing the President to include Congress in warmaking decisions.) Or you can rely on the supermajority provision that would allow an override of the balanced budget requirements.
2. Deficit spending is a lot less good than people think. Yes, it can be useful in a recession, if you buy Keynesian economics. But most of the time it's just irresponsible-- the next generation just ends up paying the bills for the previous generation's spending. And deficits crowd out investment by increasing the demand for loaned funds (the government competes with private businesses and individuals for capital) and thus increasing interest rates.
3. Politicians will always opt to run deficits rather than to raise taxes to fund their programs. Yes this can impede liberal spending, but it can also impede conservative spending. Imagine if Bush would have to choose between not funding the Iraq War and raising taxes. Wouldn't this make him a lot less likely to use demagogic rhetoric about taxes? Wouldn't this force the conservative movement to admit some things about the need for tax increases that they don't want to admit?
Why is it a terrible idea? Is it a terrible idea for each and every one of us to balance their personal budgets, or is it better to owe lots of money to someone?
Can someone please explain in clear, concise English why this is a terrible idea? I've seen deficit spending, and I'm not a fan.
Matt laughs off talk of a balanced budget just like he ridicules Robert Samuelson for continuing to point out that entitlement spending is unsustainable. What, do we just print money to achieve the progressive agenda?
Given the justified crap that Cheney took for saying "Reagan proved deficits don't matter," how can Matt always be so blithe about red ink? I don't get it.
It's a terrible idea because:
a) The Federal government uniquely is responsible for economic stablization. It would require tax increases or spending cuts automatically during a recession which would exacerbate rather than alleviate the situation.
b) It doesn't guarantee balanced budgets anyway, it leads to a bunch of smoke and mirror budgetary tricks. If you could solve this somehow (which no one really has an interest in doing) the spending wouldn't get cut, it would be pushed onto employers or states as unfunded mandates.
Well, I suppose concern regarding legislative obfuscation in these matters isn't unwise. Maybe what I want isn't a balanced budget so much as a law that discourages massive deficit spending, or something like that. Surely there is some sensible way to go about obligating law makers to spend within rational limits. It might be difficult to produce a budget amendment that is flexible enough not to pose a potential economic threat, while not being so flexible that it has no real effect on government spending. But surely there is some way of enshrining in law some kind of impediment that would require lawmakers to provide extraordinary justification for blowing more than just the giant wad the IRS hands over to them every year. I don't see how the threat of an economic recession negates the fact that wise fiscal policy demands spending within certain limits.
In an ideal world you could peg acceptable deficit spending to the unemployment rate...
Well, there you go. I'll take it!
RE "The Federal government uniquely is responsible for economic stablization. It would require tax increases or spending cuts automatically during a recession which would exacerbate rather than alleviate the situation."
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1) This is the "conventional wisdom" set up by Milton Friedman. Of course, Milton might have been full of shit re his analysis of the Great Depression. I'm more inclined to follow John Kenneth Galbraith's argument that the Great Depression resulted from too much money being concentrated into too few hands.
The Rich LIKED deflation and massive unemployment -- it made hired help a lot cheaper and the money stuffed under their mattress went farther.
2) We do have a problem with today's economy -- depreciation of modern systems ( trucks, computers,etc ) seems more rapid than the steel mills and railroads of the old days. Hence, the economy requires about $1 TRILLION of business investment every year just to maintain the status quo.
3) IF that investment doesn't happen, then unemployment and low wages result. Either capital is held back or it's sent abroad. One of Bush's bigger lies was that the $2 TRILLION tax cut for the rich was intended to create jobs here in America. But if you look at the data for business investment here vice foreign direct investment overseas, it looks like the capital from the tax cut mostly went to create jobs in CHINA.
4) If we had a government of the people --vice whores for the rich -- then we would manage capital better. Levy high taxs on profits from foreign investment , strongly encourage domestic investment and throw a few billionaires in prison is they tried to skirt the law.
But many economists are even bigger whores for the rich than are politicians and journalists , hard as that may be to believe. So we hear a lot of bullshit about the mythical "free market" and hows it's impossible to control capital.
The more important issue, IMO, isn't deficit spending per se, but deficit spending on middle class entitlements, particularly for the oldest (and wealthiest) demographic. It's easy to borrow this money from the grandkids, because they can't vote yet.
On the other hand, if deficit spending is used to finance something that future generations will benefit from too (e.g., new roads, trains, etc.), it is more equitable. These sorts of projects can also be financed by revenue bonds, as they currently are at the state and local level (i.e., general tax revenues aren't needed or promised to pay back bondholders; instead the specific revenues generated by the infrastructure projects are).
Why is it a terrible idea? Is it a terrible idea for each and every one of us to balance their personal budgets, or is it better to owe lots of money to someone?
Susan, the problem is that this a false analogy. macroeconomy is NOT like a household. During a recession, the first step of a household is to reduce its spending. If the government cut its spending during a recession, the result would be to turn a recession into a Depression. What is true at the microeconomic level is NOT necessarily true at the macroeconomic level
Even if you accept the analogy, it doesn't really hold. If General Motors, AT&T, and individual households were required to balance their budgets in the manner that's required by the Balanced Budget Amendment, there would be no corporate bonds, no mortgages, no bank loans, and many fewer automobiles, telephones, and houses.
That formulation was strict Keynes. Friedman would just say let the market work it out.
Well, okay, here's a question, don't know if it makes sense: has there ever been an example of an economic depression that it could be demonstrated was cured by ratcheting up government spending? I'm not sure all of this apocalyptic talk about the disaster that would befall the country if the government zipped up its change purse during a slump makes a hell of a lot of sense.
Re "If the government cut its spending during a recession, the result would be to turn a recession into a Depression. What is true at the microeconomic level is NOT necessarily true at the macroeconomic level "
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Again, economic mumbo jumbo. I can see benefit from the government INVESTING in infrastructure improvements during a recession to add to aggregate demand PROVIDED those investments yield real returns over time.
But unfortunately, the government has turned this idea into an excuse for pissing money away like a drunken sailor on wasteful consumption. The long term bloodletting that results is ultimately more harmful than a recession or even Depression.
If a wage-earner loses his job, his household can maintain the illusion of prosperity for a while by spending on their credit card. But that just adds to the burden they are carrying --and makes the ultimate disaster worse and more likely.
Our current debt of roughly $9 Trillion is the result of this economic bullshit. Almost $4 Trillion has been incurred by George W Bush. Do you think he invested in anything that will yield benefits in the coming decades.
Every years, we have to divert hundreds of $BILLIONS away from productive activities just to pay INTEREST on our huge federal debt.
The idea that sovereign states are immune from the final reckoning is wrong. History is replete with examples of nations destroyed by mismanagement and debt.
Any liberal who thinks the Balanced Budget Amendment is a good idea should read William Vickrey's "Fifteen Fatal Fallacies of Financial Fundamentalism". Vickrey was a Professor of Columbia University who won the Nobel Prize in Economics in 1996.
http://www.columbia.edu/dlc/wp/econ/vickrey.html
RE "Vickrey was a Professor of Columbia University who won the Nobel Prize in Economics in 1996. "
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Well, we won't hold that against him.
Poor fellow probably just got off on the wrong foot.
Well, okay, here's a question, don't know if it makes sense: has there ever been an example of an economic depression that it could be demonstrated was cured by ratcheting up government spending?
Three examples that come instantly to mind: World War II; The Kennedy-Johnson Tax Cut in 1964; Military Keynesianism in the 1980's.
The record open to interpretation on the positives but it's real easy to point out economies where "shock therapy" was introduced during economic downturns and the results are unambiguously bad.
Again, there is a difference between profitable investment and wasteful consumption.
Economists are full of crap for several reasons. One of which is that they don't look at specifics.
Yes, WWII spending spurred the US economy. But most countries enter a depression after a war -- because war encourages investment in unprofitable enterprises -- guns,etc.
The US had prosperity after WWII for two reasons: (a) the Cold War made our investments in armaments in WWII of value through their useful life (b) the destruction of other powerful nations meant our economy no longer was burdened by competition from foreign competitors -- including competition for natural resources like oil.
But the people of Germany hardly benefitted from Hitler's cure for their ills -- war. It took a generation to recover from that policy -- and would have taken SEVERAL generations to recover if not for massive subsidies from the USA. Look at the 60 year impact on the South of the Civil War, for example.
I agree that having unemployed --or underutilized -- people sitting around is itself a form of wasteful consumption.
But I also think we could have had a FAR better society than what we have today if past governments had not thrown so much money away.
We might now have lifespans of 200 years if more money had been invested in biological and medical research. We might now have cheap , fusion energy -- or colonies on Mars mining the asteroid belt -- if money had been better spent. We might have had universal medical care, a cure for cancer, and elimination of poverty if past governments had been better managed.
Paul Krugman rightfully called this the "Age of Diminished Expectations". We expect little from our leaders any more -- and we get it.
I'm with Fred, above all. Why not consider straight federal bond programs rather than the T-bills, etc. that are now used to paper over our deficit? At least in this way, debt-spending projects would have to have individual votes, the interest rate on the free market would be laid out, etc.
You could cut the supermajority to 3/5 if you thought you had to, since this lines up nicely with the cloture percentage in the Senate.
So this is William Vickrey's critique of the CW on deficits:
"Fallacy 1
Deficits are considered to represent sinful profligate spending at the expense of future generations who will be left with a smaller endowment of invested capital. This fallacy seems to stem from a false analogy to borrowing by individuals.
Current reality is almost the exact opposite. Deficits add to the net disposable income of individuals, to the extent that government disbursements that constitute income to recipients exceed that abstracted from disposable income in taxes, fees, and other charges."
I don't understand this. What is he saying about government disbursements? Is he literally saying that deficits are good because it results in the government giving money to people? Why not just print money (I understand about inflation-that's the point)? Basically, how does deficit spending avoid the inflationary problem that just printing money results in?
This added purchasing power, when spent, provides markets for private production, inducing producers to invest in additional plant capacity, which will form part of the real heritage left to the future. This is in addition to whatever public investment takes place in infrastructure, education, research, and the like.
So the argument here is something like, "Deficits are great, because they enable capital investments that will improve the production capacity of future generations." Fine. I don't think this is where all the money goes all the time, or even most of the time, but whatever.
Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity.
I don't know what this means at all. Recycle savings in excess of what can be recycled by profit-seeking private investment? Someone out there knows what that means.
Deficits in excess of a gap growing as a result of the maximum feasible growth in real output might indeed cause problems, but we are nowhere near that level.
What is the maximum feasible growth in real output? How does this get measured? And if this is one of those economic facts, doesn't it at least hint at a practical limit to safe deficit spending?
Even the analogy itself is faulty. If General Motors, AT&T, and individual households had been required to balance their budgets in the manner being applied to the Federal government, there would be no corporate bonds, no mortgages, no bank loans, and many fewer automobiles, telephones, and houses. "
I get the debt thing here, of course, I just can't figure out why a government that has a trillion dollar budget needs to spend more than it's got. It seems like the aims of the government aren't actually related in some specific way to how much money is at its disposal, right? IF all the government had was ten bucks to handle all of its business, but it could by some miracle make all the programs it manages work, then, well, what would that mean for the economy? Maybe that's a stupid question. It just seems to me that the whole logic of this "refutation" of deficits depends on an exaggerated idea of the role the government plays in the economy. You better hope it's exaggerated, because you can be sure the government can't possibly carry a ball this big without dropping it every time it tries to take a step forward.
"Reducing the 'deficit' may reduce the debt of the government, but it also reduces the supply of assets people want to acquire to take care of their security needs. Reducing the 'deficit' does not improve the real heritage left for the future, rather it impairs that heritage by leaving a legacy of inexperienced workers, impaired infrastructure, and reduced investment in plants because of reduced demand for the products, to say nothing of the impact of unemployment on health, delinquency, crime, and broken homes." - William Vickrey,
This whole thread is baffling. If the argument is seriously being made that it's no big deal to spend more than you take in for sustained periods, so much for rationalism, logical thought and the scientific method. No one believes this at the state or local government level. No one believes this in the private sector. No one with a household budget believes this. Obviously, certain circumstances would require government to spend more than it has in hand. But to seriously suggest that this is OK as a long-term approach -- are all you people stunted? Did you have lead as a side dish with your breakfast cereal?
I guess there may be some economic reasons that justify a certain margin of deficit spending-there is a limit to the lengths you can take this, but I haven't read much in the way of determining what those lengths are. (The government has set the public debt limit to the low, low rate of $9,000,000,000,000.) The way the government handles debt affects the money supply, and there is this dance they do at the Federal Reserve with interest rates that's supposed to ensure increases in the money supply don't lead to inflation. In order for there to be a deficit crisis, there would have to be some kind of US debt market crash, where everyone holding T-Bills and the like tried to cash in their share of the public debt at once. It doesn't seem like anyone considers this sort of event very likely.
So maybe this sort of thing gets talked about the wrong way. The whole concern that most Americans have with deficit spending is the implication that we are going financially overboard. The economist stands up and says, "you don't know what you're talking about, deficit spending is GOOD for the economy". And maybe it is, but that doesn't make this concern less valid, it just means that deficit spending all by itself does not constitute going financially overboard. At some point, unless someone here can correct me, I have to believe that there is a limit to spending beyond which no government, including the united states, can go. Otherwise, why have a budget at all? Why not just go completely crazy, and fund whatever the hell we feel like? Why get in a political tussle over whether to fund education in the third world or to provide financial assistance to single mothers when you have for all practical purposes an infinite amount of cash to spread around?
One way to reduce the reliance on debt would be to transition to building asset-backed trust funds to pay Social Security and Medicare expenses. State governments already do this with their public employee pension funds -- Florida, for example, has a $100 billion investment trust fund to pay its state pensions -- there's no reason the same thing couldn't be done for Social Security and Medicare.
This might require a moderate increase in payroll taxes initially, but it would be worth it to get both programs on a sustainable footing. The key would be to invest the trust funds diversified stocks, corporate bonds, etc. -- anything but U.S. Treasury Bonds -- so the funds represent assets the federal government can draw on to pay future benefits, not obligations it has to raise taxes or float more debt to pay back. If the U.S. government could get returns half as good as what David Swenson's group has gotten with his risk-averse approach to investing Yale's endowment, payroll taxes could eventually be decreased if the trust fund values started to compound faster than the growth in benefit payments.
The economist stands up and says, "you don't know what you're talking about, deficit spending is GOOD for the economy".
It depends on the economy. Defecit spending is good if you are looking at prolonged unemployment or recession, when the cycle breaks increasing taxes or cutting government outlays is to be used as a brake on inflation.
Gordon Lightfoot:
"I have to believe that there is a limit to spending beyond which no government, including the united states, can go."
There is. If the bond market thought that U.S. debt levels were getting to high for us to service the debt reliably, they would demand higher interest rates to hold U.S. Treasury Bonds. At some point, as interest rates increased, it would become prohibitive for us to finance deficit spending with bonds. We aren't there at this point now though. Our federal debt, at $9 trillion, may seem enormous to you, but the bond market looks at that debt in relation to other variables, such as the massive size of our economy, currently at $13 trillion. Although our debt is high in absolute terms, it is lower as a percentage of our GDP than many other developed countries, e.g., Japan.
The size (and future growth prospects) of our economy isn't the only variable the bond market is concerned with; another is our growing entitlement costs. If bond holders start worrying about our ability to pay these entitlements and pay interest on our debt at the same time, this would again put upward pressure on our interest rates.
One reason Dem policies such as universal health care proposals are worrisome in this context is that they will both increase entitlement spending, and, by increasing taxes to pay for the increased spending, they may depress economic growth. This one-two punch of higher entitlement spending and lower taxes may increase the cost of financing our debt even as it causes that debt to grow. This could lead to a vicious spiral of higher interest rates, higher debt, higher taxes, and lower economic growth.
There you go. I guess you're good for something after all, Fred.
Whoops, that should have been "This one-two punch of higher entitlement spending and lower economic growth..."
Thanks for the explanations; clearly I have some reading to do!!
Re " (The government has set the public debt limit to the low, low rate of $9,000,000,000,000.) "
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Actually, Treasury Secretary Paulson has just told Congress that they need to raise it again in the near future --see http://www.sanluisobispo.com/news/politics/story/105355.html
There are only about 57 million households with income above $46,400 who could afford to pay on that debt.
$9 Trillion divided by 57 Million yields a debt of about $158,000 per household.
The interest payments on that debt alone consume a huge share of our income taxes every year.
What have we gotten for that debt?? -- roughly HALF of which has been incurred by George W Bush and the Republicans in just the last 7 years??
WITH almost NO discussion by the rich mens' whores in the news media. Instead, they diverted our attention with 24/7 coverage of Anne Nicole Smith's life.
Did Anybody hear our wise economists raising any objections?
I don't doubt that there's something to Keynes' theory, but the problem is that there's a big leap from "deficit spending can sometimes be good" to "the government should be able to run a deficit whenever it feels like it". Deficit spending is USUALLY bad, because (1) most of the time we aren't facing the great depression or a war or some other situation where you need to use the blunt instrument of a fiscal stimulus, (2) since it crowds out investment, and the Fed will be forced to control the money supply anyway, this will usually cancel out much of the stimulus, and (3) politicians cannot be trusted to limit deficits to those situations where it is justified, but will instead irresponsibly pass the cost of government programs on to future generations so that they don't have to stand up to the public and explain that programs cost money.
Where I really come down on this is I think politics are likely to be somewhat more HONEST if deficit spending is harder to do. Republicans get away with opposing any tax increase for any reason because they don't have to raise taxes to pay for their own programs or tax cuts; they just run deficits.
Re "Republicans get away with opposing any tax increase for any reason because they don't have to raise taxes to pay for their own programs or tax cuts; they just run deficits."
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Exactly. The Iraq war would not have happened in Republican donors had had to pay a "Iraq war tax" to support it.
Plus, it's largely rich people who are collecting the interest payments on that $7 Trillion debt approved by Ronald Reagan, George H Bush, and George W Bush. An annual transfer of $Hundreds of BILLIONs every year from the public Treasury.
Plus, as you note, they do not have to deploy capital into businesses that employ Americans if they can simply buy US Treasury Bonds.
Alright, that's good. So I'm back to being against deficits, right where I wanted to be. Excellent.
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Comments closed August 18, 2007.
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Heads in the Sand
I don't think it's such a ridiculous idea, and most versions of it I've seen allow an unbalanced budget by a supermajority vote (2/3 or 3/4) so it's a bit of demagoguery to bring up the, "It would have prevented us from defeating Hitler!" argument.
Posted by Ron | August 4, 2007 2:33 PM