In Pursuit of a Balanced Budget – Politico

As Washington struggles to find a way to raise the debt ceiling, one piece likely left out of a compromise is the Balanced Budget Amendment. That’s a shame.

While few economists of any stripe endorse the proposed BBA text in recent House and Senate bills,something has to change in the way policymakers behave, or our fiscal challenges will only get worse. Let’s not forget that none of the plans in play – whether $2 trillion, $3 trillion or $4 trillion – cut even half the projected 10-year $10.5 trillion baseline gap.

The basic cause of rising national debt is explosive entitlement spending — and the framework that supports them.

Until the 1970s, the ratio of federal debt to gross domestic product declined during peacetime and spiked only during wartime. What changed? The growth of entitlement spending, and a lack of rules or customs to check it. With the introduction of Medicare in 1965, and then structural reforms to Social Security in 1972, Congress made binding expenditure commitments well into the future, beyond the horizon of political consequences. Without an institutional reform to constrain political behavior, deficit spending is unlikely to stop.

The idea of a balanced budget amendment is favored by 65 to 70 percent of Americans, according to recent polls. But the devil is in the details. Some version of the BBA has passed one house of Congress before —in 1982, again in 1995 and now in 2011 — but failed to pass both and move onto the states.

Rather than let this momentum fade once this debt ceiling deal is done, Washington should reconsider a budget amendment. But better structured. Here are four modifications that will improve the BBA, enhance its chances of becoming law and just maybe preempt the coming fiscal crisis.

First, the annual constraint on expenditure should be defined by the median federal revenues of the last five years, not the current year. This year’s revenues are not final, and worse, will likely fluctuate with the business cycle. Conservatives rightly criticize fine-tuning federal spending when it is counter-cyclical — but they should oppose it when it amplifies the cycle, too.

Second, any amendment should be simple — focused only on fiscal balance. That balance should count accrued liabilities in entitlements, not just outlays. It should be a neutral process — not ideological. The economist James Buchanan, Nobel laureate and professor at George Mason University, encouraged conservatives to advocate for a BBA, but warned against mixing process reform with a prescribed outcome.

Smaller government is a natural end of the process of balancing the budget, if one trusts the voters, but dictating that as the means only insures liberal opposition.

Third, any new rule or BBA should use escalating supermajorities for exemptions which are universal. Let’s unpack that. Escalating means that Congress could allow higher expenditures in a given year with a supermajority vote that increases in successive years. For example, a 3/5 vote in both houses is required the first year of exemption, 4/6 the second year, 5/7 next, and so on. Universal means that exemptions are not pre-defined, such as wars or recessions. A natural catastrophe will do.

Again, trusting future Congresses to judge what is best is one way to help passage and protect the nation.

Fourth, the BBA should provide a glide path to a lower debt-to-GDP ratio. For example, after it passes, the average fiscal gap of the preceding decade should be narrowed by one-seventh per year for seven years. That will avoid sudden, perhaps recessionary, shocks.

While many voices now object to amending the Constitution, the public and the founding fathers have a different view. Amendments have been made roughly once per decade since 1789, including the Bill of Rights. When times change, or more specifically, the behavior of our elected leaders change negatively, the nation needs to update its rules to govern such behaviors.

Something must prevent politicians who attempt long-term entitlement expenditures beyond the consequence horizon — because these have proven impossible to defund, or even revise. The rise of entitlements has radically shifted the fiscal landscape, and it is beyond the existing rules to harness the imbalance.

A better rule or balanced budget amendment will do exactly that.

Glenn Hubbard is the dean of Columbia Business School and former chairman of the President’s Council of Economic Advisers. Tim Kane is a senior fellow in research and policy at the Ewing Marion Kauffman Foundation.