The Balanced Budget Amendment is a Terrible Solution to the National Debt Problem

Dec 6, 2021 | Economics, Politics

As the world starts to weather the first catastrophes caused by global warming, we are learning how dangerous imminent threats can be. Global warming, growing income inequality, and rising costs of Social Security all cast dark clouds over the future. So too should the possibly imminent national debt crisis. The past decade has seen the national debt creep to heights not witnessed since the 1950s, and the 2020 stimulus packages exploded the national debt to levels unforeseen in American history at 128.1% of GDP. Furthermore, the Congressional Budget Office projects that the national debt may reach 202% of GDP by 2051. 

The trajectory of American debt is a bleak portrait. The balanced budget amendment is a familiar solution that has frequently cropped up in congressional bills since the 1990s. Essentially, this constitutional amendment would require Congress to allow the federal government to spend only as much as it takes in, so there is no budget surplus or deficit in a given fiscal year. It seems like a simple answer to the impending debt crisis, and over three-quarters of Americans support the balanced budget amendment proposal.

But logistically, the balanced budget amendment is a terrible idea. While it may stabilize the national debt over the long run, it would radically alter and destabilize the economy and force Congress to operate in a way that has been proven to fail in the past and could be disastrous for the future.

Unlike the famous 1.5º C danger zone for global warming, American economists do not have an estimate of the breaking point for U.S. debt, but they do know that debt becomes unsustainable when the interest rate on the federal debt remains high for an extended period. Debt is manageable when the government can pay it off, and it is sustainable when the national economy grows. As the economy grows, the debt shrinks in proportion to GDP. For example, the U.S. paid off its World War II debt by growing the economy. Currently, the interest rate on the national debt is low and should remain low for about another decade. But it is expected to rise again eventually, and when it does, Congress may need to act quickly by lowering the deficit to reduce the interest rate.

Unsustainable debt jeopardizes national economic growth, impedes Congress from making crucial investments and spending decisions, hampers lawmakers’ emergency response, and increases the risk of financial crises. Mandatory spending (for Medicare, Medicaid, and Social Security) now accounts for two-thirds of the federal budget. Funding these programs will continue to increase, and if the government does not raise revenues through taxation or other means, Congress will have to cut spending in other areas like education and defense or borrow from other countries. Reduced spending in these areas could impair other areas of American life, like the number of young Americans receiving degrees or protection from foreign threats. In addition, restricted funding for FEMA hurts emergency response, and financial downturns can turn into recessions if Congress cannot respond with bailouts. Ultimately, future generations will have to pay higher taxes to service the debt.

The balanced budget amendment was proposed in Congress four times this year. In its current iteration, the amendment would cap federal spending at 18% of GDP, an action that would drastically cut all spending, including mandatory spending. The only way for Congress to increase the cap would be during a military conflict, and a three-fifths majority would be required to raise the debt ceiling. Despite taxation being one of the few ways to increase government revenue, the amendment would require a congressional supermajority to raise taxes.

This amendment would enact a permanent austerity policy on the U.S. economy. Typically, countries only enact austerity measures when in dire financial straits, like Greece in 2015. The U.S. is not remotely close to this breaking point. While austerity assists a country in its return to self-sufficiency, it would likely hinder a country in times of prosperity. The nature of the business cycle is that all countries undergo fiscal peaks and valleys. Legislatures must lower taxes and increase spending to help the economy grow, then raise taxes and lower spending in times of debt. By enacting permanent austerity measures, lawmakers would ignore the business cycle’s existence. Automatic stabilizers and fiscal flexibility are necessary for the U.S. economy to surf the business cycle. 

Fiscal flexibility is especially crucial during a recession. When Congress seriously considered the balanced budget amendment in 2011, the economic think tank Macroeconomic Advisers projected that had the amendment been enacted in FY 2012, unemployment would have doubled from 9% to 18%, the economy would have shrunk 17%, and the balanced budget amendment’s very enactment could have caused the stock market to fall due to economic uncertainty. 

The amendment would also require Congress to compromise. How could Congress compromise and negotiate over a balanced budget when both parties have diametrically opposed solutions? Democrats want to increase taxes on corporations and the wealthy. Republicans want to cut social spending, except perhaps for defense. Both sides would vehemently oppose each other’s proposals.

The balanced budget amendment would not be the first time Congress tried to compel a budget compromise. In 2011, Congress passed the Budget Control Act, which created the Joint Select Committee on Deficit Reduction (more commonly known as the super committee) to develop and vote on a plan to reduce the deficit by $1.5 trillion over the next decade. The committee’s failure to create a plan would trigger an automatic $1.2 trillion in discretionary spending cuts over 10 years. The super committee consisted of an equal number of Democratic and Republican members from both chambers.

The super committee failed. For the sake of fiscal responsibility, all 12 members of the committee valued their party allegiances and constituencies more than compromise. The slash-and-burn strategy for the deficit nearly pulled the economy into another recession in 2013 (“the fiscal cliff”) when the first cuts took place. If a small committee could not reduce deficits, then an entire Congress cannot do it either, even if the Constitution required it.

Many top economists also think the balanced budget amendment is a bad idea. When Congress tried to pass the balanced budget amendment in 1997, 1,000 economists, including 11 Nobel Prize laureates, signed a statement condemning the proposal as “unsound and unnecessary” due to its incongruency with the business cycle. Furthermore, when a survey asked 42 of America’s leading economists if they supported the amendment, 99% said no. 

So if the balanced budget amendment is doomed to fail, what would help lower the debt? What might work today is what worked for post-war America: grow the economy faster than the debt. While the U.S. cannot expect a booming economy like what emerged from World War II any time soon, Congress could stabilize the debt as a percentage of GDP by passing budgets that increase revenues while decreasing outlays. After the country has stabilized the debt, it can start to pay off the debt in times of economic prosperity. In countries that have successfully stabilized and lowered their debts, the best strategy is to increase taxes while cutting spending. Raising taxes on the wealthy and corporations, closing tax loopholes, lowering military expenditures, and reorganizing discretionary and mandatory spending to decrease waste would help significantly reduce our country’s deficits. 

Ultimately, the balanced budget amendment is a messaging bill. Lawmakers who want to appear fiscally responsible propose the amendment to garner cheap brownie points from their constituents. In reality, the lawmakers who support the amendment in its current form are not genuinely advocating for fiscal responsibility. They want to balance the budget to lower the debt while staying loyal to other policy principles, such as never increasing taxes, that effectively contradict the government’s ability to maintain a balanced budget. The amendment would not result from a healthy compromise between parties. Instead, it would represent an overwhelming conservative victory in the fight to shape the U.S. economic system.

Featured Image by Joshua Sukoff on Unsplash.

  • Emily Hoofnagle is a second-year Master of Political Science student with interests in social policy, political behavior, social movements, and elections. She is originally from Tallahassee, Florida, and graduated from the University of Central Florida with a B.A. in political science. Emily has previously held internships with a U.S. member of Congress and a political action committee. After graduating from American University, she hopes to work for a political consulting firm or a nonprofit. In her free time, Emily enjoys reading political and historical non-fiction, reading fiction, and exploring hiking trails in the D.C. area.

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