Founding Fathers Would Have Opposed A Balanced Budget Amendment – The Purpose of National Government Was to Borrow

Both official Washington and the chattering political classes have spent most of the past 12 months debating how to cut the government budget, reduce deficits, and limit debt.  Key groups, and perhaps the most vocal and strident groups in the debate, have been the self-described “constitutional conservatives” and Tea Party types. They have staked out the position that government deficits, debt, and indeed any taxation except the most minimal taxation is un-American and antithetical to “first principles” of the Founding Fathers.  They maintain a myth that the U.S. Constitution was created to limit the U.S. government’s ability to tax or run a deficit.  Unfortunately for them, history and the constitution itself tell a different tale.

Historian William Hogeland punctures the myth that the Founding Fathers would have agreed with today’s Tea Party types using an historian’s favorite tools – the facts. The following originally appeared at New Deal 2.0. Besides the applicability to today’s debates, it makes fascinating reading about the historical situation that led to the Constitution after the Revolution.  (emphasis below in bold are mine)

Why Debt Ceilings and Balanced-Budget Requirements Violate the Original Intent of the Constitution

So-called “constitutional conservatives” ignore the realpolitik of our nation’s origins.

In a critical and entertaining portrait of the anti-tax activist Grover Norquist, the New York Times columnist Frank Bruni presented Norquist as an absolutist obsessed with forcing modern political life to conform to ideas that Norquist associates with the American founders’ first principles.  Of course, Norquist is by no means alone in taking that position. That the Constitution came into existence to keep taxes low, the federal government small, and national debt at zero is an article of faith among many who, like Michele Bachmann, have taken to calling themselves “constitutional conservatives.” And faith is required to believe it, as the Norquist interview shows. To make his supposedly constitutional argument, Norquist cites the first amendment on freedom of religion and the second on the right to keep and bear arms, and then goes on to cite absolutely nothing, in either the articles or the amendments, that so much as hints at a constitutional requirement to balance the federal budget, avoid debt, tax no more than people like Norquist deem appropriate, and keep government small.

He can’t cite anything to that effect because while balancing budgets, restraining borrowing, and keeping taxes low and government small might be good goals, depending on what you mean by them, it is impossible to locate in the founding national law any requirement to accomplish them. Indeed, the reality of founding history leads to the reverse conclusion.

The Constitution came about precisely to enable a newly large government — a national one — to tax all Americans for the specific purpose of funding a large public debt. Neither Alexander Hamilton nor his mentor the financier Robert Morris made any bones about that purpose; James Madison was among their closest allies; and Edmund Randolph of Virginia opened the Constitutional Convention by charging the delegates to redress the country’s failure to fund — not pay off, fund — the public debt, by creating a national government.

Beginning during the War of Independence, and continuing throughout the 1780s, American nationalists committed themselves to a small class of upscale high financiers (largely identical with the American nationalists), who had bought bonds from the confederation Congress in hopes of earning regular, tax-free, 6% interest payments — not in the Congress’s crashing paper currency but in hard, cold metal or its equivalent, stable bills of exchange. Morris, Hamilton, Madison, and others believed that swelling the debt to immense proportions would make a coherent nation out of thirteen squabbling states and make that nation a player on the world economic stage. Their plan to do so depended partly on making military-officer pay a pension, thus turning the entire officer class into public bondholders — and giving Congress new power to tax all Americans to support that debt.

Hamilton is often reflexively presented as finding inventive ways to pay down the national debt. His real accomplishments were of course “funding and assumption” — absorbing the states’ war debts in the federal one and funding that huge obligation via nationally collected and nationally enforced taxes.

Hence the all-important provisions of the Constitution giving Congress very broad powers to tax and acquire debt. To 18th-century American nationalists across the political spectrum — to our founders and framers, that is, from Hamilton to Madison, from Morris to Randolph, from the financiers to the planters — national taxing and borrowing were ineluctably connected to the very purpose of national government.

Nobody has to like it. But the original intent of the Constitution involved sustaining and managing public debt via taxation.

Both the articles and the amendments do, of course, limit government and restrict its power. But no ratified amendment has ever qualified Congress’s power of the purse, which in the minds of the framers explicitly involved the power to take on debt and fund it. In their tweets and blogs, “constitutional conservatives” have been promoting a balanced-budget amendment with reference to the tired notion that since households and small businesses must balance their budgets (as if!), government must too. They link that economically useless prescription to the widespread fantasy that our Constitution was written, amended, and ratified for just such a purpose. The framers saw it just the other way.

But really everybody, not just “constitutional conservatives,” buys into the fantasy now. History is rarely helpful politically. It’s hard to imagine liberals bringing to debt-ceiling and balanced-budget debates the painful realpolitik of our national origins, which show the Constitution existing, originally, to finance the investing class and yoke that class’s interest (in every sense) to national power. Thus the Times gives the Bruni piece a headline referring to Norquist’s “dangerous purity” — as if the danger in Norquist’s approach lies in a too-rigid insistence on basic principle. There’s nothing purist about Norquist. Whether his ideas may be proven right or proven wrong, they are anything but originalist. Like those of Bachmann and the rest of the anti-tax right, Norquist’s principles are novel, innovative, and weirdly postmodern, extra-constitutional at best.

Stark realism about the actual founding purposes of the Constitution will always have limited use in political debate. But it would be nice, at least — though unlikely — if we would argue these issues on their merits, and leave the Constitution alone.

William Hogeland is the author of the narrative histories Declaration and The Whiskey Rebellion and a collection of essays, Inventing American History. He has spoken on unexpected connections between history and politics at the National Archives, the Kansas City Public Library, and various corporate and organization events. He blogs at http://www.williamhogeland.com.

Would a Balanced Budget Amendment Help or Hurt?

One component of the deal to raise the debt-ceiling is a requirement that Congress vote later this year on a “Balanced Budget Amendment” to the Constitution.  Is such an amendment a good idea?  At first glance, the idea seems attractive to a lot of people for whom the debt and deficits are seen as the key problem facing the economy (I am not one of these people).  After all, if you believe debt is bad, and debt comes from having deficits, then why not just pass a law amendment to the constitution that prohibits deficits, right? Well there are several problems with the idea.  Some are strategic – it’s really not a good idea to force a balanced budget every year.  But other problems are practical – the amendment, particularly as proposed now, simply wouldn’t work and would set up perverse incentives. Let’s look at these problems.

First off, there’s a bit of false advertising on the part of advocates of the “balanced budget amendment”.  The reality of what has been proposed goes beyond requiring a balanced budget.  A balanced budget would simply require government revenues to equal government expenditures each year.  The currently proposed amendment is really a “balanced budget with a strict cap on spending amendment”.  It has two parts. Not only would the budget have to be balanced each year, but the government spending would limited to 18% of GDP unless overridden by a 2/3 majority of Congress. The spending cap would limit government expenditures even if the budget were balanced.  The advocates of the balanced budget amendment, most of whom are Tea Party Republicans, are really proposing to re-write the Constitution to make it impossible for a majority of the duly elected Congress to expand the government beyond the limits they want.  It’s a rewrite of democracy.

The amendment and the spending cap in particular are totally unworkable in a practical sense.  First, the amendment and spending cap assumes that GDP and government spending are independent variables.  They aren’t.  In fact, government spending (G) helps determine GDP both directly since it  is a component of GDP and indirectly since the other components, consumption spending (C) and investment spending (I) and net exports (X-M) are themselves partially functions of government spending.  GDP = C + I + G + (X-M) by definition.  If you cut G, you cut GDP.  Suppose GDP = 100 and G = 20.  That’s government spending is 20% of GDP.  That would be too high under the amendment and would require a cut of government spending – revenue increase would not be allowed.  So suppose government cuts it’s spending to 18.  Keep in mind such a cut would be monumental. That would be a 10% (2/20) cut in government spending and we just had a paralyzing debate in Washington over how to cut spending by only 2-5%.  Imagine trying to cut 10%!   But even if the government did it, it wouldn’t work.  Because cutting government spending from 20 to 18 would take GDP down also.  The cuts would reduce both numerator and denominator.  If spending were cut to 18, then GDP would be no higher than 98, still leaving government spending as 18.37% of GDP. It would still be above the limit and require even deeper cuts which would then also cut GDP.  The reality would be even grimmer because C, I, and net exports all are partially influenced by government spending.  If you cut government spending for example, the people who got paid that government money, be they defense contractors, Social Security beneficiaries, teachers, or Medicare doctors, experience lower incomes.  They then cut their consumption spending and investment spending.  This is called the multiplier effect.

The practical problems are even greater when revenue is considered.  Government revenue, or taxes, are effectively a % of GDP.  That’s because virtually all the money collected by the government comes from GDP-related activity. Virtually all government revenue is either income taxes, payroll taxes, corporate profits taxes, or excise taxes on things that are used in production like gas.  If GDP goes up, then taxes collected goes up. If GDP goes down, then taxes go down also. Government spending goes in the opposite direction. When GDP goes up, many spending categories decline like unemployment compensation, welfare, Medicaid, etc. When GDP goes down, those spending items go up automatically.  These are called automatic stabilizers and they’re a major reason why recessions after World War II had been so mild compared to the depressions experienced routinely before WWII.  A balanced budget amendment means getting rid of automatic stabilizers and making mild recessions into worse recessions or even depressions. As  Simon Johnson at Baseline Conspiracy  put it:

 It makes no sense to target, as a matter of constitutional process, two numbers that are both outcomes of deeper economic processes.

A second very serious practical problem is with measurement.  GDP, while it’s commonly used and accepted, is only an economic concept, not a legal one.  The definition and calculation of GDP is subject to interpretation and depends on the prevailing views of statisticians and economists during any such era.  Simon Johnson at Baseline Conspiracy explains:

But GDP is not a legal concept – rather it is an economic measure, the details of which change all the time, subject to the prevailing view of best practice among statisticians.  Just to take one example, the flow value of housing services for people who own their houses is “imputed” to create a number that is roughly equivalent to what renters pay.  The goal is to more accurately measure a key component of consumption, which comprises the largest category of spending within GDP.  But the emphasis here is on “roughly” – the models used are sometimes called into question and must be revised from time to time.  And imputed spending on housing is a big number – probably around $1 trillion in today’s economy (with total GDP at about $15 trillion).

If an enterprising future administration wanted to lower spending relative to measured GDP, they could convene a panel of experts that could duly find that our current practice of not valuing household services – like cooking and taking care of children – is a statistical aberration as well as an affront to people who work very hard.  That should add at least $5 trillion to our annual GDP.  Alternatively, a statistical adjustment in the other direction would force real and painful spending cuts.  The constitution is the wrong place to pursue such details.

GDP is too fuzzy and imprecise of a measure, with too much estimation involved, to be enshrined in the constitution.  As an analogy, suppose we decided that we wanted to avoid the recent acrimonious debate over raising the debt-ceiling.  Suppose we thought too many Congresspeople acted too childishly.  Imagine if there were a proposal for a constitution amendment that required only “mature and intelligent ” adults “with an IQ above average” be allowed to run for Congress.  How would mature be defined?  How would it be measured?  We would make Congress dependent on a test, an IQ test, that itself is subject to revision and interpretation.  Later administrations would pressure psychologists to change the IQ test to satisfy the needs of their party.  The same happens if we enshrine GDP as a requirement in the Constitution.

In policy terms, the balanced budget amendment is a very bad idea. A balanced budget requirement forces the government to act pro-cyclically instead of counter-cyclically.  This means instead of fighting a recession, the government’s actions would make the recession worse.  Granted there are provisions in the amendment to waive the balanced budget requirement if GDP drops 10%, but keep in mind how severe that is.  The Great Recession/Financial Crisis of 2007-09 was only a 6% drop in GDP.  Government wouldn’t have been able to counter it.  The stimulus program, which was too small to trigger recovery but did successfully stop the free-fall, wouldn’t have happened until the crisis had indeed become as bad as the Great Depression.  A balanced budget amendment means a return to the old days before World War II when the U.S. routinely experienced severe depressions and financial crises. Again Simon Johnson:

.. sometimes it makes a great of sense to apply an economic stimulus to an economy in freefall.  One such moment was 1930 (and 1931 and 1932), when no stimulus was applied.  Other moments were 2008 and 2009; both President Bush and President Obama initiated stimulus packages.  When credit for and confidence in the private sector evaporates, do you really want the government sector to be forced to make quick cuts – or raise taxes?..

The second policy objection to this balanced budget amendment is that it is really a back-door attempt to circumvent democratic debate and decision-making.  The amendment proposes to limit government as part of the economy to 18%.  But why 18%?  Supporters claim that is what the U.S. has spent on average in recent decades.  But why is that the right number?  The size of government is a political, democratic choice that is up to the population at the time.  If today’s population wants a smaller government, they can elect politicians to do that.  And if some future generation should decide that 18% is not the right number, that maybe they want a different set of priorities and to devote a larger share of the nation’s resources to public goods, why shouldn’t they be able to do that?  Many nations devote a much higher % of GDP to public goods instead of private consumption goods.  Their economies are successful and their people are satisfied with it.  Having the current crop of legislators set a limit on what future generations may choose or do is not consistent with the concept of responsive democratic government.  It makes no more sense to enshrine an 18% limit on government spending in the constitution than it does to constitutionally enshrine a fixed limit on the number of soldiers the government may have.  It should be up to the representatives of each generation.

I’m not the only one who’s opposed to a balanced budget amendment.  And, the opposition isn’t all “Keynesian Democrats” (I don’t qualify as one of those either).  Simon Johnson, the author I’ve quoted above, is a former Chief Economist for the IMF.  The IMF has historically advocated and pushed for balanced budgets, yet it opposes this kind of handcuffs of economic policy.  Further, a Republican economist, Bruce Bartlett, has articulated many of these same problems with the amendment.

Arithmetic, Reality, and Dreams of A Balanced Budget

Apparently, the Republicans and Tea Partiers are insisting that the federal government budget be balanced immediately (the demand for no increase in the debt ceiling) and that it be done entirely from spending cuts (the “no tax increases” pledge) to discretionary spending.

This is enough to demonstrate that they simply are not dealing in reality and cannot do simple 2nd grade arithmetic.  I’ve commented before and in classes about how politicians simply cannot deal with large numbers – they confuse millions, billions, and trillions.  McCain on the campaign trail once insisted that approximately 100 different cuts of 1-50 million dollars each would be enough to close a trillion dollar deficit.  Only off by a factor of, oh, 2000 times!

The budget deficit is running approximately 40% of the total budget.  In other words, to bring spending down to the level of current tax collections, we would have to cut 40% of government spending.  Yet, a simple perusal of the government’s budget (the one they passed just 3 months ago), shows that non-defense discretionary spending is only 15% of the budget.  Even if we add in defense and completely shut down the entire armed forces and fire lay-off all soldiers, we only have 38% of the budget.  It still wouldn’t balance.

I don’t know what’s worse.  The fact that these politicians keep saying these things even though a child can tell you it won’t work, or the fact that the news media keeping repeating it without the slightest challenge, or the fact that apparently millions of Americans believe them.