The Balanced Budget Amendment Delusion

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the coming book “The Benefit and the Burden.”

This week the House of Representatives will take up a balanced budget amendment to the Constitution. An idea that has been kicking around for ages, it has never overcome the hurdle of needing a two-thirds approval vote in both houses of Congress. (After which it would not require the president’s signature but would need to be ratified by three-quarters of the states to take effect.)

Today’s Economist

Perspectives from expert contributors.

The concept of balancing the budget annually is a bad idea but not an unreasonable one. However, the idea of mandating a balanced budget through the Constitution is dreadful. And the proposal that Republican leaders plan to bring up is, frankly, nuts.

Perspectives from expert contributors.

The Founding Fathers took the necessity of balancing the federal budget to be self-evident – with no need to mandate it because economic circumstances severely constrained the government’s ability to spend more than taxes covered.

The memory of the hyperinflation of the War of Independence was fresh, and people were rightly concerned that deficits would lead to the printing of money to cover budgetary shortfalls, restarting inflation. Moreover, the domestic capital market was virtually nonexistent during the early years of the republic, and all Americans were wary of borrowing from abroad unless absolutely necessary.

Consequently, the budget was usually balanced for the nation’s first 150 years, except during wartime, and strenuous efforts were made to pay down the debt as soon as hostilities ended. This budgetary norm didn’t change until the 1930s, when economic stagnation and widespread deprivation made balancing the budget impossible. Also, the economic theories of John Maynard Keynes became popular and argued that large deficits would be necessary to restore growth.

Conservatives view the adoption of Keynesian economics as original sin, opening the door to a vast expansion of government. Instead of being paid for with politically unpopular tax increases or spending cuts, new spending programs were to a large extent financed with seemingly costless deficits. The economist James Buchanan called this “fiscal illusion.”

He had a point. We would have less spending if its tax cost was fully apparent. If people knew their taxes would go up or they would lose government benefits whenever spending increased, we would have a lot less spending.

Unfortunately, conservatives intentionally destroyed the remnants of the implicit balanced budget constraint in the 1970s so they could cut taxes without having to cut spending at the same time. Finding enough spending cuts to pay for big tax cuts would have doomed their efforts, so they concocted a theory, “starve the beast,” to maintain a fig leaf of fiscal responsibility.

Under this theory, deficits are intentionally created by tax cuts, which puts political pressure on Congress to cut spending. Thus, cutting taxes without cutting spending became the epitome of conservative fiscal policy. Unfortunately, it didn’t work.

We gave starve-the-beast theory a test during the Reagan administration, but as I have shown previously, when push came to shove, Reagan was always willing to raise taxes rather than allow deficits to get out of control.

We gave starve-the-beast theory another test during the George H.W. Bush and Clinton administrations. They both raised taxes and, according to the theory, this should have caused spending to rise, because tax increases feed the beast. But they didn’t. Spending as a share of the gross domestic product fell to 18.2 percent in 2000 from 22.3 percent in 1991, according to the Congressional Budget Office.

We gave starve-the-beast theory another test during the George W. Bush administration. Taxes were slashed, but spending rose – again, the exact opposite of what the theory said should have happened. The economist Bill Niskanen asserted that the result was not surprising because the Republican position on taxes effectively reduced the tax cost of spending.

Nevertheless, conservatives like Grover Norquist insist that starve-the-beast theory works, which is why they relentlessly push for still more tax cuts despite the obvious failure of previous tax cuts either to stimulate economic growth or restrain spending, and oppose even the most trivial tax increases no matter how big the deficit.

Historically, one problem conservatives had with a straightforward balanced budget requirement was a concern that it might lead to tax increases. It would also make further tax cuts more difficult to achieve.

Today, most conservatives support a constitutional requirement that will only restrain spending but make tax increases effectively impossible, while continuing to permit tax cuts regardless of the deficit. This is the essence of the “balanced budget” amendment that Republicans plan to vote on.

The amendment reported by the House Judiciary Committee in June would limit federal spending to 18 percent of “economic output” (whatever that is) without a three-fifths vote in both the House and Senate and would require a two-thirds vote to raise taxes. The latter requirement is even more stringent than it appears because it applies to the full membership of both houses, not just the percentage of those present and voting. Taxes, on the other hand, can be cut with a simple majority vote.

Space prohibits a full discussion of all the technical problems with this poorly drafted amendment. A July 8 report from the Congressional Research Service does a good job of going through some of them.

These include the fact that gross domestic product is nowhere defined in law, nor could it be because it is a continually evolving concept; 18 percent of G.D.P. is a totally arbitrary figure that couldn’t be achieved this year even with the abolition of every federal program other than Social Security, Medicare, national defense and interest on the debt, because the deficit is twice as large as total nondefense discretionary spending.

Outlays would actually have to be well below 18 percent of G.D.P. in practice because future spending is held to 18 percent of the previous fiscal year’s G.D.P., and there is no practical way of enforcing the amendment through the federal courts. For more details, see my July 11 article in Tax Notes magazine.

The truth is that Republicans don’t care one whit about actually balancing the budget. If they did, they would want to return to the policies that gave us balanced budgets in the late 1990s.

The crucial one was higher taxes, which virtually all Republicans opposed in 1990 and 1993, and budget controls that prevented tax cuts unless offset dollar-for-dollar with cuts in entitlement programs, which Republicans abandoned in 2002 so they could cut taxes without constraint.

Of course, no Republican favors such policies today. They prefer to delude voters with pie-in-the-sky promises that amending the Constitution will painlessly solve all our budget problems.

A Close Look at the Perry Tax Plan

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the coming book “The Benefit and the Burden.”

In an effort to rejuvenate his flagging campaign for the Republican presidential nomination, Gov. Rick Perry of Texas announced his support for a flat-rate income tax in a Wall Street Journal op-ed article on Oct. 25.

Today’s Economist

Perspectives from expert contributors.

Mr. Perry said he would establish a single rate of 20 percent on corporate and individual incomes, with individuals receiving a personal exemption of $12,500. The estate and gift tax would be abolished, and there would be no taxation of dividends and capital gains. All deductions, credits and exclusions would be eliminated except for mortgage interest, state and local taxes and charitable contributions.

Perspectives from expert contributors.

The flat tax is an idea that has been kicking around Republican circles for 30 years. The publisher Steve Forbes made it the centerpiece of his unsuccessful 1996 and 2000 runs for the G.O.P. nomination. He is now advising Mr. Perry and was glowing in his praise for the governor’s plan. Writing in The New York Post, Mr. Forbes said it would “usher in a great economic boom.”

Larry Kudlow of CNBC, who has never seen a Republican tax cut he didn’t like, was so excited by Mr. Perry’s flat tax and Herman Cain’s 9-9-9 plan that he attributed the recent stock market rise to their influence. In a National Review column on Oct. 21, he said the stock market rally was “discounting a new G.O.P. growth plan that will replace the dreary Obama tax-the-rich mantra.”

Although Mr. Perry praised the simplicity of his plan, it would actually complicate the tax computation for many people, because they would have to calculate their taxes two or even three different ways when the alternative minimum tax was also included. That was because Mr. Perry’s flat tax would be an optional tax system; those who wanted to stay in the current system could do so.

This is really just a gimmick to allow Mr. Perry to say with a straight face that everyone would get a tax cut. “Taxes will be cut across all income groups,” he said. His plan allows Mr. Perry to skirt every difficult issue about the impact of tax reform, like the huge increase in taxes that would be paid by the poor because they would lose all refundable tax credits, including the earned income tax credit.

Keep in mind that refundable credits give many people a negative tax rate. That is, they pay no income taxes but still get a Treasury refund. Going from a negative rate to zero would mean a tax increase for such people, as a Tax Foundation analysis illustrates.

To prevent people from gaming the system, Mr. Perry would insist that all those choosing the flat tax would have to stay in that system permanently. It’s not clear if those paying income taxes for the first time would be permitted a choice.

The idea of an alternative flat tax system was originally cooked up by a Wall Street Journal editorial writer, Steve Moore. But at least his idea was that the alternative system would be something like a pure flat tax with no deductions whatsoever. However, Mr. Perry would keep three key deductions in his system, which undermines the whole point of the flat tax, which is to wipe the slate clean. It also makes no sense because those who want to keep the deductions for mortgage interest, charitable contributions and state and local taxes could simply stay in the current system.

One consequence of Mr. Perry’s flat-tax deviationism is that his proposed tax form is lengthened to a full page from the original postcard that Mr. Forbes promised. Because the 1040EZ tax form that most people use is also one page, it’s hard to see those who care about the length of their tax return flocking to the Perry plan.

Of course, if everyone could simply choose to be taxed less or not, it absolutely guaranteed that Mr. Perry’s plan would be a massive revenue loser. In 2007, the Tax Policy Center analyzed a plan similar to Mr. Perry’s that had been proposed by Senator Fred Thompson of Tennessee, who briefly competed for the 2008 Republican nomination. The analysis found that revenues from allowing people to choose would be substantially less than if everyone were forced into the new system.

Giving people a choice also substantially mitigated whatever positive economic effects would be achieved from a flat tax. Its whole point is to change economic behavior by, for example, forcing people to stop investing so much of their savings in owner-occupied housing and investing instead in corporate stock or other forms that will add to the economy’s productive capacity.

Because no one is forced to change their behavior under the Perry plan, there is no reason to think that there will be an increase in economic growth if it is implemented. It would just lose revenue and complicate the tax code. That’s all. Edward Kleinbard, a University of Southern California law professor, calls the Perry plan “a promise to put a unicorn in every pot.”

Mr. Perry has countered with an “analysis” by John Dunham, a former tobacco industry economist, that shows growth will explode under his plan. The analysis states that it was commissioned by the Perry campaign and presumably was not done free. Using “dynamic scoring,” the analysis says gross domestic product will be an astonishing $3.5 trillion larger by the year 2020. Implausibly, it says that federal revenues would be $407 billion higher than under the Congressional Budget Office’s current projections and will rise even as a percentage of G.D.P.

There is no explanation whatsoever for how these estimates were arrived at, and they appear to have come from some sort of black box. When I asked Professor Kleinbard, who was formerly staff director for Congress’s Joint Committee on Taxation, what he thought about this, he corrected me. The estimates came from a “black magic box,” he said.

As Simon Johnson of the Massachusetts Institute of Technology recently explained on this blog, studies show that perhaps a third of a tax rate cut might be recouped through higher growth, and only if spending is cut enough to keep the deficit from rising.

Governor Perry says he will slash spending to 18 percent of G.D.P. from its current level of 23 percent. No explanation was offered of how this would be done or how such a huge spending cut would ever be enacted by Congress. It should be noted that even if every domestic program other than Social Security, Medicare and Medicaid is abolished, that would not be enough for Mr. Perry to reach his goal — all those programs together come to just 4.2 percent of G.D.P.

Thus, Mr. Perry’s plan cannot be taken seriously. I don’t think it’s meant to be, at least by those of us who don’t plan on voting in Republican primaries. It’s just a signaling device, telling the Republican faithful that they can trust Mr. Perry on the tax issue.

Whether the plan makes any sense as a matter of policy is irrelevant to its purpose, which is to win him the Republican nomination. With an Oct. 25 ABC News/Washington Post poll showing the flat tax much more popular among Republicans than Mr. Cain’s 9-9-9 plan, it might just work.

Podcast: Steve Jobs, Unemployment and Patriotic Spending

The death of Steve Jobs has set off a global outpouring of tributes rarely seen for a business figure. What made him so special?

John Markoff and Steve Lohr, two veteran reporters, covered him for many years, and both knew him well. In the new Weekend Business podcast, they describe him as singularly passionate and focused, a leader who demanded dedication from those around him and would not tolerate mediocrity. He thought of himself as a “technology leader,” says Mr. Markoff, who wrote Mr. Jobs’s obituary for The Times. While Mr. Jobs was not a computer programmer or a designer in the formal sense, he was superb in guiding others and in imagining and shaping projects, Mr. Lohr says, elaborating on arguments he makes in a column in Sunday Business.

The unemployment rate remained at 9.1 percent in September, according to the Labor Department report on Friday, with too few jobs produced to budge that rate, as Motoko Rich says in a separate conversation in the podcast. The Economic Cycle Research Institute is forecasting a new recession, the focus of my Strategies column in Sunday Business, but Ms. Rich says that the latest jobs report suggests that while the economy is weak, it’s not contracting at the moment.

Richard Thaler, the University of Chicago economist, says fear and anxiety have caused many corporations and individuals to hold back on spending. He advocates “self-interested patriotism,” that is, carefully planned spending on labor-intensive projects by businesses and people who can afford to do so. Mr. Thaler elaborates on this approach in the Economic View column in Sunday Business.

And David Gillen and David Segal discuss the filming of food commercials, the subject of Mr. Segal’s cover article in Sunday Business.

You can find specific segments of the podcast at these junctures: Steve Lohr and John Markoff on Steve Jobs (31:12); news headlines and Motoko Rich on unemployment (20:57); David Segal on food commercials (14:57); Richard Thaler (6:54); the week ahead (1:20).

You can download the program by subscribing from The New York Times’s podcast page or directly from iTunes.

Public Job Creation

Nancy Folbre is an economics professor at the University of Massachusetts Amherst.

President Obama has signaled a new commitment to combating unemployment, with a major speech planned for later this week. The big question is whether his battle plan will go beyond indirect means of encouraging long-run employment growth (such as tax incentives) to include public job-creation programs that could significantly lower unemployment over the next year.

Today’s Economist

Perspectives from expert contributors.

His Republican critics take a “been there, done that, didn’t work” approach to economic stimulus. But President Obama’s stimulus plan, the 2009 American Recovery and Reinvestment Act, relied primarily on tax cuts and increases in aid to the states, shying away from direct federal job-creation efforts that were considered politically risky. (Jared Bernstein, chief economic adviser to Vice President Joseph R. Biden Jr. at the time, provides a clear account of the administration’s rationale).

Perspectives from expert contributors.

The stimulus helped the economy toward recovery. Increased aid to the states temporarily buffered the impact of state and local budget cuts. But over all, the Obama administration has been characterized by public job elimination rather than creation. The latest estimates of government employment (preliminary estimates for July 2011) show a significant decline since 2008, to about 22 million from about 22.5 million.

This decline in public employment will inevitably be intensified by further cuts in public spending and has particularly ominous implications for women, who make up a disproportionate share of state and local payrolls.

As Eileen Appelbaum points out, men were harder hit by job losses in 2009 than women but also faster to regain jobs as private sector hiring revived. A recent report from the Institute for Women’s Policy Research provides a vivid, up-to-date graph of these trends.

As of August 2011, the seasonally adjusted unemployment rate for men 16 and older was 9.6 percent; that for women, 8.5 percent. A new Economic Policy Institute report notes that persistently high unemployment has lowered the earnings and family income of a wide swath of American families.

Democrats to the left of President Obama have long argued the need for direct job creation through new federal programs, targeted transfers to state and local governments or both. Robert Reich, who served as secretary of labor under President Clinton, has offered a model speech along with a model plan.

The National Urban League, a prominent civil rights organization, has outlined a 12-point proposal, Putting America Back to Work.

Representative George Miller, Democrat of California, has introduced several legislative proposals, most recently the Local Jobs for America Act. Money would go directly to eligible local communities and nonprofit community organizations that would decide how best to use them. The act would also underwrite approximately 50,000 additional private-sector on-the-job training positions to help businesses put people back to work.

Representative Jan Schakowsky, Democrat of Illinois, has sponsored the Emergency Jobs to Restore the American Dream Act, which puts more explicit emphasis on money for schools, health care and community service. This program would be fully financed through separate legislation creating higher tax brackets for millionaires and billionaires, elimination of subsidies for major oil companies and closing of corporate tax loopholes that encourage offshoring of American jobs.

In a post last year, I described several specific proposals to create jobs in home-care services, including a voucher program to help subsidize the cost of home aides for the elderly, moving them out of nursing homes and back to their own homes.

Last week, Heidi Hartmann, president of the Institute for Women’s Policy Research, mobilized an online discussion of participants in the Womens Scholars Forum (including me). The resulting briefing paper summarizes a number of additional ideas, such as expanding the length of the school day and school year to improve educational outcomes and developing an Urban Conservation Corps.

The briefing paper emphasizes a longstanding concern of women’s organizations: the need to make sure that “women get their fair share of jobs that are nontraditional for women, for example technical and craft jobs in construction, transportation, and green energy and that are supported by federal dollars or federally guaranteed loans.”

A good example of targeted spending in this area is a small grant that the Women’s Bureau of the Department of Labor recently awarded to Austin Community College in Texas to recruit women to a renewable energy training program.

A strong public job-creation effort could help qualified graduates of programs like these find jobs improving the energy efficiency of schools and other public buildings. The employment impact would be both quicker and more reliable than subsidized loans or tax breaks for renewable energy companies.

Right now, the unemployed themselves represent an important form of renewable energy that is going to waste. That’s why President Obama should take a close look at proposals to put them to work in a variety of publicly financed jobs.

Defining Economic Interest

Nancy Folbre is an economics professor at the University of Massachusetts Amherst.

Republican resistance to raising taxes represents a distinctly minority view. The latest New York Times/CBS poll shows that only 34 percent of adults believe that taxes should not be increased on households earning $250,000 or more to lower the budget deficit. Even this modest percentage surprises me, because only about 2 percent of American households report income above this amount.

Today’s Economist

Perspectives from expert contributors.

Most conservative economists argue that higher tax rates at the top would hurt everyone because they would lower economic growth. I don’t buy this argument for a variety of reasons that I’ve explained elsewhere. However, the argument seems pretty easy to sell.

Perspectives from expert contributors.

People don’t always recognize and effectively act on their economic interests. As one of my favorite behavioral economists, Dan Ariely, put it, we are all more like Homer Simpson than Superman.

I’ve always identified more with Marge Simpson than with Homer, but in any case, if the Simpsons don’t act on what we believe are their economic interests, economists should be able to explain why.

Reaching for a better understanding of the Tea Party seems like a good place to start, since it gets much of the credit or blame for current Republican priorities.

According to last week’s poll, Tea Party members are slightly better educated and more prosperous than the typical American. Still, only 17 percent earned more than $100,000 a year and 2 percent earned more than $250,000. I wish the survey had asked how many were unemployed or working in the public sector.

Some evidence suggests that the Tea Party’s interests are shaped by its racial composition. Surveys show that it includes few African-Americans (3 percent of the total) and has greater membership in the South than in other regions (41 percent of voters compared with 15 percent in the Northeast).

At that time, a majority reported that they believed that “too much has been made of the problems facing black people” (52 percent compared with 28 percent of all Americans).

Asked to volunteer what they don’t like about President Obama, the top answer, offered by 19 percent of Tea Party supporters, was that they just didn’t like him.

The most recent poll confirms this animus: Only 12 percent of Tea Party supporters approve of President Obama’s job performance, compared with 20 percent of Republicans and 48 percent of Americans.

Dislike and disapproval obviously inclined them to support Republicans who gave the president a hard time. But as Kate Zernike pointed out in a recent article in The New York Times, Tea Party members did not line up squarely behind those who wear their mantle in Congress. A CBS News poll taken in mid-July showed that 53 percent of Tea Party members, along with 66 percent of all respondents, favored a combination of tax increases and spending cuts.

One self-identified Tea Party Web site goes so far as to decry wealth inequality and calls for a progressive tax on wealth.

So why did Tea Party Republicans in Congress take such a hard line? Their views — like those of most other elected representatives — are not primarily shaped by the views of their constituents.

While the Tea Party movement got a big initial boost from small donors, its elected representatives quickly began relying on political action committees and major contributions from Wall Street firms. These almost certainly grew after the Supreme Court, in its Citizens United decision in January 2010, loosened campaign finance restrictions.

Many Tea Party members may be unaware of the extent to which wealthy political conservatives like the Koch brothers have bankrolled their efforts and shaped legislative priorities.

Partly because it does enjoy significant grass-roots support, the Tea Party has helped Republicans deflect attention from growing concerns about economic inequality and class conflict.

But these concerns are likely to intensify as unemployment rates remain high and the economy moves back toward official recession.

An ABC News/Washington Post poll conducted last month found that most Americans said the biggest difference between President Obama and Republicans lay in whose economic interests they aimed to serve.

Perceived differences based on household income categories, like the “$250,000” benchmark, seem less salient than those based on big business versus everybody else.

A striking 67 percent of Americans said Republicans were protecting the interests of large business corporations, compared with 24 percent who believe the same of President Obama (see chart below).

Meanwhile, the Tea Party is taking the fall. Its popularity has declined significantly in recent months. The latest New York Times/CBS News poll found the Tea Party was viewed unfavorably by 40 percent of the public, up from 29 percent in April.

As the economy nosedives, Tea Party populists are likely to become even less popular. And perhaps Tea Party members will change their perception of where their own economic interests lie.