As the debt ceiling struggle intensifies, members of Congress are calling for adoption of a balanced budget amendment. As with all proposals to amend the Constitution, the first question is: Why didn’t the Founding Fathers include a balanced budget requirement in the Constitution? How could they have missed the tendency of legislatures to spend more than they raise in taxes?
The Framers actually understood that democratic decision-making bodies tend to overspend. From bitter experience during the Revolutionary War, they also believed that financial markets would prevent a government from living beyond its means. What they could not foresee was that subsequent developments in financial markets would, for a long period of time, give the U.S. government the ability to run deficits and issue debt with little regard for the costs. That period is now ending.
The Founders understood from the experience of the Continental Congress the consequences of deficit spending and the resistance of the taxpayers (then the States) to paying taxes. Because spending greatly exceeded tax receipts, the dollar plummeted in value, hard money left the country, the government could not borrow more and the army barely held together. The Founders therefore saw no need to impose a structural limit on the national government’s ability to engage in deficit spending. From firsthand experience, they understood that financial markets would constrain the government and force it to modify its taxing and spending policies.
What the Founders could not envision was that the nation would emerge from two world wars as the globe’s dominant economy, and that other countries would decide to do business in our money. This reserve currency status largely removed the constraint of market discipline. The government could run chronic deficits without significantly affecting the availability or cost of borrowing. The Founders understood human nature, but could not imagine this unprecedented financial development.
An initial version of a balanced budget amendment passed the Senate in 1982, but failed in the House. Proponents cited public opposition to higher taxes and Congress’ inability to discipline spending. Opponents emphasized the need for flexibility in governance and the inadvisability of subjecting the government to a one-size-fits-all fiscal policy, given the scope of the challenges it faces (armed conflicts; recessions). Super-majorities of 60 percent in each body of Congress would have been required to override the balanced budget requirement. Subsequent experiences with super-majority requirements in California have shown that such procedural provisions can lead to gridlock and make fiscal policy disputes intractable.
Since the early 1980s, the United States has exhausted the world’s demand for dollars. Federal debt has increased from 35 percent to 75 percent of GDP and is rising quickly. Prospective debt levels are forcing Congress to consider major tax increases and spending cuts by a combination of voter objections and increasing market concerns, for the first time in generations, about the ability of the United States to handle its debt load. Financial markets, thus, are in the process of reimposing external discipline over federal borrowing that the Founders considered an inescapable fact of life.
In these circumstances, whatever rationale may once have existed for a balanced budget amendment has greatly diminished. Adoption of the current version would subject critical spending and taxing decisions to insuperable procedural obstacles (i.e., a two-thirds majority would be required for future tax increases). The country would be better served by adopting more flexible procedures to control spending. They include enforceable budget limits and spending offset requirements, which worked successfully in the 1980s; and tools that other countries subject to market discipline—enforceable provisions that limit growth of debt to GDP measured on both an annual and total basis.