* How to write a balanced budget amendment that means something
Topics: Budget
13 Mar 1995
From: "DG Ervan Darnell"
Credit to Jeff Daiell for making, what is in retrospect, a trivial
observation: write an amendment that prohibits the government from spending
money it does not have. But isn't that what the different BBA's did? No,
it's not. The various BBA's said the government had to write a balanced
budget, which is a very different matter. The way things work now is that
the government *estimates* income but makes spending *promises*, that it
must keep, in the form of a budget. This includes not only long term
entitlement obligations but the simple day to day things like wages and
cartons of mousse for the tree hugger. Of course, the estimates are always
inflated so that more spending can go into the budget. Much of the debate
over the BBA was about what to do when ex post facto these estimates were
found to be wrong and the government was already in debt.
Scrap all of the nonsense by turning the situation around, if the government
can only spend the money it has, corrections and estimates are non-issues.
Of course, it can no longer make absolutist budgets. This seemingly simple
proposal would actually be such a radical change in the way things are done
it is inconceivable to the beltway crowd. It means that, like any private
company, the government might reach the point where it cannot pay its
obligations because the money simply is not there. While most people are
apoplectic at the thought of the government shutting down, it seems fine to
me ;-) More realistically, people will be asked to take a delay in their
pay checks until assetts can be sold, certain functions shut down, pending
procurements delayed (with appropriate penalties). Bureaucrats in the FCC
might start looking for another job. Soldiers will keep serving in the
expectation that things will be straightened out by their next pay check.
Social workers, who have already forsaken real work to waste their lives on
uneconomic work, will grumble and keep working. This has happened before
when the debt ceiling was reached. In that case, things simply coasted
until the Senate voted the next day to raise the ceiling. Under this
proposal, the pain would be greater, but as in the debt ceiling case, the
missile silos would not be abandoned. All of this would lead to a clear
lesson: the government is not infinitely stable and infinitely trustable; it
depends on real money and real resources flowing just like private
individuals do. It, too, makes promises that it cannot keep. That seems to
me a perfectly good lesson to drive home. Hopefully one or two skids onto
the mountain road shoulder will encourage the driver to start being a little
more careful too.
-----------------
Having said that, it remains an open question of whether or not we actually
want a balanced budget. Before you think I have gone off the liberal deep
end withing inhaling first ;-), let me explain. Spending is the problem,
not debt. Government spending is destructive. It necessarily destroys
wealth by forcing capital to be inefficiently employed. A typical figure is
that the government spending is 50% effective, i.e. 50% destructive. $1000
spent on public education buys as much as $500 would on private, etc.
Anything that lowers spending is the right answer.
So, what about the deficit? If the government borrows $200G this year,
that's $200G that it did not extract from the economy, $200G that can still
be used productively. Let's say the prime rate for the best commercial
customers is 7%. That means money is worth 7% more next year than this year
based on real improvements in productivity. So, that $200G not spent on
taxes is worth $214G next year (even if it is consumed instead of invested
this analysis still holds, because relative benefit of consumption fits the
NPV model). The flip side is that the government borrowed that $200G and
now taxes must be collected to pay the principal and the interest. Well,
the interest accrues at T-Bills, etc., rates which are similar to the prime
rate, around 7%. Thus, the tax bill to retire that debt is about $214G. In
other words, the total taxes paid are about the same, regardless of whether
they are paid now on spending or later on debt. Yes, this is a simplistic
analysis, there are lots of other factors, and it may be that one way or the
other makes more sense (the supply siders are in favor of more debt, purely
as an economic matter, and other fiscal conservatives are in favor of less).
In any case, we are talking about maybe $20G, one way or the other. That's
chicken feed compared to the $200G itself, which is what we really must get
rid of. Eliminating a $200G deficit is not nearly as good as eliminating
$200G of spending.
So, the question of a balanced budget amendment is not one of economics, but
rather one of psychology. Which frightens an average voter more?
Unbalancing a balanced budget and suffering an immediate tax increase or
racking up more debt? The former seems more plausible, but both Bush and
Clinton managed tax increases. Bush, but not the Republicans, suffered for
his. That Clinton suffered at the polls for his tax increase seems less
likely than for his other policies. Also, consider the current debate over
cutting school lunches, etc. No one is arguing that this would be a good
thing because the money would do more good elsewhere, which is the right
argument. Rather people, even the 'extreme' conservatives, are arguing that
the deficit is so evil and so overwhelming that it justifies starving
children and letting old people die in the streets. The sort of progress
involved in killing these programs may never have come without the threat of
the deficit. I do not presume to have a final answer to this question. I
only mean to show that it is more a matter of psychology and just what the
right psychology may be is not entirely obvious.
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