A sagging economy requires what we call countercyclical policy, stimulus to counter a downturn and provide a boost. The need for countercyclical policy became apparent in the 1930s, after the opposite response to economic trouble caused a dizzying collapse; its application early in Franklin Roosevelt’s presidency succeeded in pulling the United States out of the Depression (until a premature tightening in 1937-38 pulled us back down into it).
Countercyclical policy is what every industrialized country in the world employed when the credit shock hit in late 2008, to avoid a global disaster far more serious than the one we faced. Under a balanced-budget amendment, however, no countercyclical policy could emanate from Washington. Spending could not grow to combat the slump. And while the Obama stimulus did not jump-start a robust economic recovery, any objective analysis would find that absent the $800 billion stimulus, the economy would have spiraled down much further.
State balanced-budget requirements make the option of a federal balanced-budget amendment dangerous. When state revenue declines during economic downturns, state spending on unemployment and Medicaid increases. To balance their budgets, states have to raise taxes and/or cut spending, the opposite of what is needed to emerge from a fiscal funk. This is the economic equivalent of the medieval practice of bleeding to cure any ailment, including anemia. In 2009, the fiscal drag from the states amounted to roughly $800 billion; in effect, the stimulus from Washington merely replaced the blood lost by the state-level bleeding.
Even balanced-budget amendments that have a waiver for recessions are a risk because there is often a lag between a recession itself and when it is recognized. That lag could produce more inopportune bleeding.
The amendment under consideration has its own deep flaws. The Republican proposal would cap spending each year at 18 percent of gross domestic product. Because the formula is based on a previous year’s economy, it would mean, according to Republican economist Don Marron, a cap of more like 16.7 percent of GDP. This in turn means that the House-passed budget proposed by Rep. Paul Ryan, which calls for draconian cuts in Social Security, Medicare, Medicaid and discretionary domestic programs, would not be nearly draconian enough. Accounting for population changes, the 16.7 percent limit would mean slashing Social Security and Medicare well below the levels contemplated by the bipartisan Simpson-Bowles fiscal commission, and cutting discretionary spending by half or more. It is hard to make the case that decapitating food inspection, air traffic control, scientific research, Head Start, childhood nutrition programs and more, as the amendment would almost certainly require, would lead to a healthier economy, itself a necessity to solve the debt problem.
To be fair, the amendment has a safety valve — a two-thirds vote of both chambers can authorize a deficit. But imagine the chances of securing a two-thirds vote in this Congress. Similarly, its requirement that 60 percent of both houses vote to increase taxes or the debt limit would result in political gridlock and opportunities for legislative blackmail.
That this amendment has been endorsed by all 47 Republicans in the Senate, and that a dozen Republicans have pledged not to increase the debt limit without the amendment, are sad commentaries on our politics. But the effects should this amendment be adopted would be frightening.
Norman Ornstein is a resident scholar at the American Enterprise Institute and co-author of “The Broken Branch: How Congress Is Failing America and How to Get It Back on Track.”