Balanced Budget Amendment: The View from History

Since the 1840s, many U.S. states have had balanced budget requirements in their state constitutions. Some have worked but others have gotten worked around in various ways, via exceptions or pushing the debt down to the municipal level. Exceptions can be minimized by the language of the clause or amendment but the tradeoff is that ironclad language is inflexible in the face of crises, unexpected situations, etc.

I much prefer returning to what Bill White has called America's Fiscal Constitution. Here are excerpts from my review of his book as it appeared on page 38 of the fall edition 2014 of Financial History:
 

Every policymaker, politician, and pundit in America should read this book even though author Bill White, a long-time Democratic  mayor of Houston turned investment banker, might seem at first blush an unlikely policy hero. White’s weighty tome (500+ pps.) would qualify as a doctoral dissertation at any university on the planet because it contains 40+ pages of notes, almost 40 pages of bibliographic entries, and almost 40 pages of statistical appendices reconstructed from original sources. Most impressively of all, the end result is not a partisan political screed but a highly readable and well-balanced account of the rise and demise of America’s unwritten fiscal constitution, the set of budgetary rules that made the United States one of the world’s most creditworthy nations in the nineteenth and twentieth centuries.

White shows that U.S. lawmakers long countenanced only four acceptable use of debt: preservation of the union; expansion of the nation’s borders; waging of war; and keeping the government afloat during recessions. After each war, expansion, and recession, the federal government stopped borrowing and sometimes even ran surpluses. That, combined with robust economic growth, prevented the national debt from ballooning out of control and kept the country’s credit strong, ready for use during the next emergency or opportunity.

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White suggests that America’s fiscal constitution could be reconstituted through a few, simple-to-implement reforms. First and foremost, the budget needs to be made, in Jefferson’s words, “clear and intelligible” to “any man of any mind” (p. 363). That means producing a tax-financed budget based on good faith revenue estimates updated monthly. Any appropriations above the tax-financed budget need to be clearly distinguished as such and voted on separately so that voters can readily identify politicians who want to borrow and spend instead of make difficult choices about tradeoffs. Second, the debt ceiling system needs to be dismantled because Congress votes on the ceiling only after it has voted to spend more than its tax revenues. Third, bond issue votes, like the thousands held annually at the state and municipal levels, should be held at the federal level as well. “Nothing,” White argues, “prevents Congress from holding a national referendum on whether to incur federal debt for specific purposes and amounts” (p. 369). Since 1970, he notes, state and local debt levels have grown at only half the federal rate.

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