Can America solve its current fiscal crisis?
The rapid mushrooming of America’s national debt, combined with the resurgence of limited government sentiment, has revived interest in a once dormant legislative prospect: a federal balanced budget amendment. To be sure, the idea of constitutional controls on government finances is nothing new. In 1936, a per-capita limitation on public debt, spearheaded by Minnesota Representative Harold Knutsman, reached the House floor. Since then, several other similar constitutional amendments have been proposed and voted upon, each time without success. Yet today’s sentiments stand near historic highs. This past year alone, congressmen from both parties have proposed eighteen balanced budget amendments, ranging from the mushy and unenforceable to the politically and economically unfeasible.
The Balanced Appeal
In its purest form, the idea of a balanced budget amendment draws skepticism from many economists. From a Keynesian perspective, the amendment’s merits—restricting spending—are actually flaws. In July, five Nobel laureates wrote to Congress that restricting federal expenditures to certain deficit levels would “mandate perverse actions in the face of recessions.” Paul Krugman, opposing the amendment, affirmed, “The worst thing we can do for future generations is not to run sufficiently large deficits right now.”
This doubt, however, is not strictly a left-wing phenomenon. Even David Boaz, executive vice president of the Cato Institute and an eminent counterweight to the theorists of the left, concedes when discussing balanced budget amendments that “Statesmen should have the ability to ‘address…economic emergencies.’” Thus, even free-market libertarians like Boaz, to some extent, accept that handcuffing the government and mandating austerity during recession may not be a wholly pragmatic solution to America’s fiscal problems.
What is needed, instead, if a balanced budget amendment is to be seriously considered, is flexibility, and an institutional means for coping with extraneous circumstances such as severe economic downturn. New proposals must include an effective mechanism of curbing debts, while at the same time allowing the government to respond appropriately to the prevailing economic conditions. This budgetary amendment would require skillful crafting, a technocratic composition, and extensive political wrangling. While certainly a tall order, such a piece of legislation is not without precedent, at least in an international context.
The German Option
In Germany, the current exemplar of effective budget regulation, a recently crafted fiscal constitution has been implemented in order to deal with what had been a creeping deficit problem. It is flexible, enforceable, and smartly countercyclical in nature. Economist Thurstayan Baskaran, an expert in the new German legislation, lauded the measures in an interview with the Harvard Political Review, pointing out that the fiscal constitution “does take the economic situation into the account, but requires that [the budget] be balanced according to the business cycle.” Likewise, Lars Feld, a member of the German Council of Economic Experts, the official advisory body to the Bundestag, pointed out to the HPR that while the new fiscal constitution is “relatively flexible” in nature, it effectively “puts Germany into a position where it cannot easily incur debt.” Among its provisions is an allowance for German politicians to temporarily suspend the regulations during economic crises, while still holding the government accountable for debt accrued during a downturn.
What makes the German solution most interesting, however, is that it was born not out of anti-government conservatism or the principles of the libertarian right, but rather out of the pragmatic fusion of academic knowledge and policymaking. It requires economic calculations by apolitical bodies and a barrage of specific figures, such as a maximum deficit of 0.35% of GDP in neutral market conditions, all of which are key components of the scheme as a whole. This legislation came about as a direct result of decades of continuous growth in German public debt and is not an attack on the welfare state, but rather an attempt to curb what had been, in the words of Baskaran, “politicians’ propensity to spend too much, while taxing too little.”
Domestic Concerns
Unfortunately, balanced budget proposals in Congress lack any of the adeptness of the German model. While many popular proposals have elements of flexibility, such as supermajority votes to temporarily override new fiscal constraints, they largely lack certain necessary built-in mechanisms, such as automatic business cycle adjustments. Further, these proposals are often riddled with hyper-partisan elements, such as Congressman Bob Goodlatte’s (R-VA) proposed governmental spending cap at 18 percent of GDP. The only mainstream proposal that includes a robust form of countercyclical policy is that of Tea Party-aligned Congressman Justin Amash (R-MI). However, Congressional support for Amash’s bill is dwarfed in comparison to that of other, more ideological bills, including Goodlatte’s. It is precisely because of the hyper-political nature of American balanced budget proposals that they fail to muster serious academic support. Conversely, in Germany, it is the economic and technically crafted aspects of the new fiscal constitution through which the new legislation effectively balances the dangers of austerity with the pitfalls of imbalanced public finances.
To be sure, praising the German model is not tantamount to a prescription for the United States to copy that nation’s set of fiscal controls. After all, the political and economic conditions of the two nations are indisputably quite different. However, when congressional leaders begin to search for pragmatic solutions to the problem of public profligacy, a success story abroad would be an appropriate place to start. Baskaran insisted that, because of the German controls’ flexibility relative to the business cycle, these rules were at least partially exportable. Feld likewise points out that the “constitution is not a blueprint, but is in line with what Switzerland already has,” and, thus, the origins of the German rules illustrate that such constitutional regulations are applicable in varying national contexts. Still, an examination of the specific, technocratic elements of potential balanced budget amendments may ignore the actual ideological fault lines upon which the two parties are fighting in Congress.
Conservatives have offered a variety of proposals like Goodlatte’s 18 percent budget cap to attack the growth of government, while attempting to masquerade these proposals as a pragmatic strategy to fight imbalanced finances. Liberals, on the other hand, by-and-large reject constitutional law as a means to quell public debt, a notion epitomized through the words of President Obama when he claimed that while “we need to get to the point where we can balance the budget…[w]e don’t need a constitutional amendment” to do so. Perhaps Obama and the Democrats place too much trust in their own capacity to put the nation’s fiscal house in order without any coercive, structural rules; perhaps the Tea Partiers and Republican establishmentarians trust too little. However, when and if Congress starts to discuss the possibility of a serious and smart balanced budget amendment, all they must do is look abroad to see that success, when pragmatism rules, is not unprecedented.
Gram Slattery ’15 is a Staff Writer.
Photo Credit: images_of_money, Flickr