Budgeting

A Modest Proposal for a Balanced Budget Amendment

"The debt is like a cancer [that is] truly going to destroy the country from within."

-Erskine Bowles, 2010

Most have heard, with ever increasing volume, the debate over the U.S. Government's budget deficit. While the majority of Americans according to polls agree there is a deficit problem, most do not realize what the implications of running long-term budget deficits and accumulating a significant debt burden are. To put our current budget deficit problem in perspective, a June 2011 budget review indicated we borrow 41 cents for every dollar we spend (Congressional Budget Office (CBO), 2011, p.1). As of June 3rd, 2013, the national debt was $16.7 trillion and projections estimate by 2035 the national debt to "equal about 80%" of the economy's total annual output or Gross Domestic Product (GDP), which would be the highest percentage in U.S. history except for the period directly after WWII (CBO, July 27th 2010,p.3). Does our current government debt matter? Running sizeable long-term deficits will impact our children in a number of ways. If spending at current levels continues, the resulting debt burden will result in economic hardship and potentially higher taxes for future generations, which in essence constitutes generational theft. Our excess today will ultimately have to be paid by our children tomorrow. One way in which we can ensure a mechanism is in place to halt running budget deficits and instill fiscal discipline in our federal government would be the adoption of a Balanced Budget Amendment.

Before one can really argue for a Balanced Budget Amendment, one has to articulate the potential consequence of accumulating large debt burdens. Alan Greenspan "argued that paying down the national debt is beneficial for the economy: it keeps interest rates lower than they otherwise would be and frees savings to finance increases in the capital stock, thereby boosting productivity and real incomes" (Greenspan, April 27, 2001). If Alan Greenspan's argument is true, one could rephrase his argument in the alternative by suggesting increasing government debt is not beneficial for the economy: it keeps interest rates higher than they otherwise would be and restricts savings to finance increases in capital stock, thereby decreasing productivity and real incomes. The Congressional Budget Office has echoed that premise by stating the impacts of the current growing deficit and the forecasted future debt if left as is will reduce savings, increase interest rates, and lower income growth (CBO, 2010, summary-p.11). By running long-term budget deficits and accumulating significant debt relative to the economy's overall output or Gross Domestic Product (GDP), the U.S. government will have to raise future taxes or curb spending through various austerity measures.

What will be the potential future impacts of drastically higher taxes? Depending on how the higher taxes are levied to combat a significant debt burden relative to GDP, higher taxes may lead to higher interest rates, lower real incomes, decreased capital investment, and even impact our ability to compete internationally as it relates to trade. Significantly higher taxes could induce or prolong periods of stagnation, recession, or even depression. What if our federal government does not have the option of raising taxes because of future dismal economic conditions and cannot borrow more money because investors will no longer lend? The unthinkable could possibly come true and our federal government would default; thereby and with some certainty, send the U.S. economy into a depression. While the level of restriction to economic growth is difficult to measure with any accuracy, a strong argument can be made that taxes will increase substantially for future generations to pay for our excess if spending continues unchecked. Another option would be severe austerity measures. Given the polarity that exists today between both political parties, it is foreseeable to conclude they will not be able to agree where cuts to the budget will be made.

After debate, both parties may agree to sequestration and automatic across the board cuts, which could potentially have devastating impacts and even compromise national security. If we can conclude with certainty our continued excessive spending today will lead to some level of economic hardship for our children tomorrow, there is a moral issue at hand. Who will ultimately be impacted? Our children and our grandchildren will have to pay for our excessive spending tomorrow. In essence, we, through our elected officials, are making a conscience decision to kick that can of austerity down the road to our children.

If we wish to avoid the criminal act of generational theft, our spending needs to be curbed. Although a substantial portion or our debt woes can be associated with the recent recession, there is no excuse to continue the unchecked deficit spending going on today. Social welfare programs such as Medicare and Social Security should both be revamped by increasing the retirement age or decreasing the level of benefits to ensure the solvency and viability of those programs in both the short-term for the baby boom generation and for their children and grandchildren in the long-term. Another area to consider reforming would be pork barrel spending. While every legislator wants federal tax dollars allocated towards his or her district, procuring votes from officials by allocating federal tax dollars, which should be their own state's tax dollars, for programs within a respective legislator's district or state constitutes nothing short of bribery.

A safeguard, such as a line-item veto, needs to be implemented to ensure votes are not being bought and sold with tax dollars. Another area for consideration would be the U.S. Military. For National Security, our Military needs to be prepared to not only fight a conventional war, but also to continue to fight the war on terrorism. While our Military should be the best compensated, the best trained, and the best equipped in the world, the focus for budget purposes should be on eliminating excess without compromising overall capability. The list of austerity measures could go on and on, but reforming social welfare programs, eliminating pork barrel spending, and eliminating waste in the Military should yield the substantial savings needed to balance the budget. A Balanced Budget Amendment would force legislators to take on and face these needed budget cuts without simply borrowing more.

In any case, there is really no question as to what will happen in the long-term by running a balanced budget. While there will be a shared sense of pain initially, a Balanced Budget Amendment would instill fiscal discipline within our federal government by ensuring our elected officials only spend what they have coming in. Moreover, this would be the first significant step to paying down our national debt and ensure our elected officials deal with the challenges of the day versus continually kicking the can down the road. A Balanced Budget Amendment would potentially open the door to lowering overall taxes when the debt is paid down; thereby, increasing the personal wealth and prosperity of our children. If we make the decision now to pay for our own excess, we will create a better life for our children tomorrow. We need to have a nimble government that can expand or contract based on the needs of the day with a mindset to continually increase the prosperity for future generations. There may be situations, especially during times of war, where there is a need to run a budget deficit and to accumulate burdensome debt. If there is a need, there could be a stipulation in the Balanced Budget Amendment in which a two-thirds majority vote would allow deficit spending. In the end, instilling fiscal discipline and responsibility within our federal government will ensure our country remains that shining city on a hill.

"The fore horse of this frightful team is public debt. Taxation follow that, and in its turn wretchedness and oppression."

-Thomas Jefferson, letter to Samuel Kerchival

Douglas O'Coyne Jr., MBA

Sources:

Congressional Budget Office (CBO), Monthly Budget Review, June 7th 2011.

Congressional Budget Office (CBO), Federal Debt and the Risk of a Fiscal Crisis, July 27th 2010.

Congressional Budget Office (CBO), The Budget and Economic Outlook: Fiscal Years 2010 to 2020, June 2010 (Revised August 2010).