By Simon Johnson
Some House and Senate Republicans have worked hard to ensure that a “balanced budget” constitutional amendment be included in the mix of policies under consideration to address longer-run fiscal issues in the United States. Such an amendment is presented as way to keep spending and deficits under control, by requiring that federal spending not exceed revenues.
But there are three main problems with this potential approach as it is currently articulated.
The first issue, which has been forcefully identified by Bruce Bartlett, is that there is no way to make this amendment work in practice. The language currently proposed would, as part of the “balance”, limit federal government spending to 18 percent of Gross Domestic Product (GDP), subject only to a potential override by a 2/3 majority in both houses of Congress. On the table, in effect, is a balanced budget amendment with a spending cap.
But GDP is not a legal concept – rather it is an economic measure, the details of which change all the time, subject to the prevailing view of best practice among statisticians. Just to take one example, the flow value of housing services for people who own their houses is “imputed” to create a number that is roughly equivalent to what renters pay. The goal is to more accurately measure a key component of consumption, which comprises the largest category of spending within GDP. But the emphasis here is on “roughly” – the models used are sometimes called into question and must be revised from time to time. And imputed spending on housing is a big number – probably around $1 trillion in today’s economy (with total GDP at about $15 trillion).
If an enterprising future administration wanted to lower spending relative to measured GDP, they could convene a panel of experts that could duly find that our current practice of not valuing household services – like cooking and taking care of children – is a statistical aberration as well as an affront to people who work very hard. That should add at least $5 trillion to our annual GDP. Alternatively, a statistical adjustment in the other direction would force real and painful spending cuts. The constitution is the wrong place to pursue such details.
Second and more seriously, imagine that this constitutional amendment was in place and that federal spending was roughly at its limit relative to the size of the economy. And then the financial sector blows up again – either through no fault of its own (which is the current prevailing myth on Wall Street about 2007-09, believe or not) or because of some toxic combination of malfeasance and malpractice (the predominant view among many other people).
The blame game is irrelevant when GDP drops 10 percent; the issue is how to prevent a Great Depression. But after the GDP decline, the same level of nominal spending is no longer 18 percent of GD but suddenly 20 percent (check the math for yourself) and now there is a constitutional crisis to confront — before we get to the question of whether any tax cuts or other forms of stimulus might be appropriate. It makes no sense to target, as a matter of constitutional process, two numbers that are both outcomes of deeper economic processes.
And, to be frank, sometimes it makes a great of sense to apply an economic stimulus to an economy in freefall. One such moment was 1930 (and 1931 and 1932), when no stimulus was applied. Other moments were 2008 and 2009; both President Bush and President Obama initiated stimulus packages. When credit for and confidence in the private sector evaporates, do you really want the government sector to be forced to make quick cuts – or raise taxes?
Third, why is 18 percent of GDP the right number to set in stone? The argument given – for example at a recent hearing of the Joint Economic Committee of Congress – is that this is what the federal government has spent, on average, in recent decades.
That may well be the case, but so what? The federal government, after all, used to spend much less – see the important new book Government versus Markets: The Changing Economic Role of the State by Vito Tanzi (Cambridge University Press, 2011) on the relevant history (and much more). Alternatively, as the United States begins to have a larger share of older people relative to the total population, perhaps it makes sense to increase spending – as a share of the total economy – on people over the age of 65? Or, given today’s problems in public education, perhaps we should consider investing more in children who can – if they are able to become sufficiently productive – support an ageing population while only paying moderate taxes.
What is the right amount of federal government spending relative to GDP? That’s a great question worthy of considerable deliberation, including during the presidential election of 2012. Why would setting it in stone now at precisely 18 percent of GDP make sense?
An edited version of this blog post appeared earlier this week on the NYT.com’s Economix; it is used here with permission. If you would like to reproduce the entire post, please contact the New York Times.
The Baseline Scenario 
From wiki – “There were 155.6 million females in the United States in 2009. The number of males was 151.4 million. At age 85 and older, there were more than twice as many women as men. People under 20 years of age made up over a quarter of the U.S. population (27.3%), and people age 65 and over made up one-eighth (12.8%) in 2009.[13] The national median age was 36.8 years.[13] Racially, the U.S. has a White American majority.”
There are twice as many people under the age of 20 than there are people age 65 and older – so WHAT is everyone talking about….?
There is NO DEMOGRAPHIC CRISIS.
The WARS emptied out SS $$$ (can you say *mercenary* high tech, Patriot Act shielding the PONZI scheme – Rumsfeld’s *cheap* war?)
and there are NO JOBS for those 20 years old and under either now or in the FUTURE according to global corporations sitting on trillions in PROFITS they sucked up by eliminating the jobs of STUPID USA people who provided them with the creative intelligence behind all their corporate patents – prove me wrong!
Ask questions like why someone sells ketsup one day and the next is in charge of reading the Risk Management Plan tea leaves accurately for FUTURE health care needs of USA citizens?
We the People have no *government* other than how we are still governing ourselves from getting all out violently Nihilistic like D.C. and Wall Street…
October2011.org will be a peaceful Constitution Convention setting an energy and infrastructure plan in place.
3, 2, 1 – sucking sound just got louder to make sure there is NO USA FIAT $$$$ for that plan….that’s *free market* capitalist competition with FIAT money?
You have missed what is really behind all the Republicons are doing: stealing workers retirement funds. The surpluses Clinton left for Bush were enough to pay off the entire US debt by the time that the Social Security/Medicare trust funds would have to be amortized for beneficiary payments, all without having to raise taxes to pay for the amortization of those trust funds. The surplus Bush inherited was made up almost entirely of excess payroll taxes building up the trust funds. Bush took those excess payroll tax receipts and gave them “back” as income tax reductions, heavily weighted to the wealthy–who didn’t create those surpluses in the first place. By doing this, Bush guaranteed that taxes would have to be raised in order to amortize the trust funds. The failure to do so simply permits the Republicons to steal the money contributed by workers for their retirement. Everything about not raising taxes or limiting expenses, is about stealing our money.
@ bmz
First things first, regarding Simon’s post – “Would a Balanced Budget Amendment Make Sense?”
Absolutely not for reasons explained by Simon, and that a Budget (as in every household in America) is a “Living, Breathing, Variable, too be tweaked in good times as in bad times,… but never to be set in stone!
Why would there be need of savings institutions or banks for lending if not for the power to create wealth on both sides of the aisle? (PS – Just get rid of the Monster from Jekyll Island!)
Now, moving onto Billy (Slick Willie) Boy (forget about Georgie (fuzzy neck) Boy #43, because he just about bankrupted every business he got his trigger happy [3] fingers on!) who gave us NAFTA & CAFTA [?] which was likened to the “Bretton Woods Treaty” simulated for the Clinton’s roaring 90’s. Imagine the crafty *White`Water* Architectural Master,… “Hillary”, that worked for Walmart, and other affiliates, setting up huge banking accounts “South of the Border” for big business to finance the re-construction of all {(South America – we all know what happened further south?) (Canada wasn’t in the equation other than energy,…basically a wash)} Mexico? What a boom!
Unfortunately, for fast Willie, a “Honey-Pot” sped the flow of envious anger from the unconquerable hypocrite, Newt the sleuth, that ironically, also fell into the “Honey-Pot Trap”,… amazing? Thus the landslide stalled?
Think of Rubin, Summers, and “The guy (Richie Rich?) he gave amnesty to,… on his last day in office? Think of the welfare mothers he put out on the streets, and the ‘Lincoln Bedroom’. Think of Vince Foster, and Mr. [X] Ron Brown [?], his Secretary of Commerce? Think of the unclassified military documents that the Chinese bartered for with Sandy running a cow path back and forth to the Archives of the Library of Congress? Think! Their all crooks,…period! That’s why I’m an Independent confused in Florida?
Ref: “Bill Clinton on Budget & economy” (4/19/11)
http://www.ontheissues.org/celeb/Bill_Clinton_Budget_+_Economy.htm
Ref: “The Myth of the Bill Clinton Surplus”
http://www.craigsteiner.us/articles/16
Please note; (as usual) if links fail must “Google’ ref:
Thankyou Simon and James
Earle– I hate to interrupt you while you are on an ad hominem roll, but I don’t care if Bill Clinton is the antichrist; he was the only one who effectively stopped the Republicons from stealing our money.
I have not read the recent book by Vito Tanzi cited here, but it is worth noting that Tanzi has been a decidedly conservative advocate a smaller government role. In a 2005 paper, he re-asserted his claim that “no country needs to spend more than 30 percent of its GDP for public-sector activities.” So he is guilty of at least one of the fallacies that Simon Johnson names here. That 30% just coincidentally happens to be roughly the percentage the US was spending in 2005. Again, we see the cultish, obsessive, fetishistic — and destructive — attachment of American and American-trained economists to The American Way Is the Only Way. If the events of the past three years prove anything (not to mention most of the past 30 years), it is that the US has lead the world in misguided economic policy.
@ Annie…the demographic crisis alluded to is that the ratio of wage earners to retirees will drop to about 2:1 in about 10 years or so. Right now we’re somewhere around 3:1 and dropping, which is what your data suggests. The Social Security system was begun with a ratio of more like 5:1. Of course, if we have 10% unemployment, then the ratio of inputs to outputs further degrades.
Dr. Johnson states: “But GDP is not a legal concept – rather it is an economic measure, the details of which change all the time, subject to the prevailing view of best practice among statisticians.”
This illustrates part of the problem. Our money system is entirely theoretical. It is the product and the endeavor of statisticians, economists, financial analysts and other charletons.
It surely has nothing to do with reality as most Americans LIVE IT.
And @bmz: I believe it is impossible to eliminate debt in a debt-based monetary system. No debt = no money. And nobody’s going to let THAT happen.
All us regular people have a big learning curve to climb on this. But those in power are so arrogant and self-satisfied with their wealth amid the suffering of the country that I’ll just bet we’re going to climb that curve.
worth reviewing:
http://en.wikipedia.org/wiki/Balanced_Budget_Amendment
(Geeze…I thought that was what “ECONOMICS” was supposed to be managing…) Taking Moral Hazard to Moral depravity, by placing it in the hands of politicians.
Carla the only reason for debt based currency is the depravity of politicians who will not accept their responsibility for managing the currency.
I did not know we did not have a definition of GDP that should be simple to fix which would end the moral hazard of economicist and lawyers changing the rules all the time. Simply make it the actual hard goods produced by the economy and eliminate any use of financials as part of the equation. A debt free currency based on this definition could be spent freely by the government into the economy.
@beene: “Carla the only reason for debt based currency is the depravity of politicians who will not accept their responsibility for managing the currency.”
I know.
The politicians are just doing their jobs. They know who they work for. And it ain’t us. It’s the money boys.
If we want the politicians to work for us, we’re going to have to make them do it.
The American people don’t know this yet. The Tea Party rumbles, but most people don’t realize it’s just a ruse started by the Koch brothers. Most Americans have never heard of the Koch brothers. But they will.
@beene,
In order to have a meaningful definition of ‘GDP’ we would have to be using a proper book-keeping framework of rules. Getting there from where we are today is a difficult to fix, since there are no signs that anyone in power has a clue as to what a proper book-keeping framework of rules accomplishes. The art disappeared thirty years ago when book-keeping fell into the hands of computer software developers. Software developers simply do not understand how a double-entry pattern of rules keeps a society of cultures honest. Programs that have taken book-keeping’s place form an inept counting of value, and even more inept accounting of rights to ownership.
This blog is a good example of the issues at hand: as hard as Simon and James work to make important banking points, I see no signs that either of them understand the art of a proper book-keeping framework of rules. Book-keeping has never been a topic of discussion in the years I have read the blog. Meanwhile Ponzi Schemes and bubbles of every sort abound, and seem to be getting more plentiful by the day. A proper book-keeping will expose the silliness of today’s record keeping, almost immediately. Unfortunately there is no one in a position of influence to advocate this fundamental problem. The only alternative is the renewal that will salvage what can be salvaged after a full economic collapse that is sure to be upon us as we sit upon our hands and act as if the issue will heal itself.
Step one is to make the art of book-keeping a topic of discussion at least once or twice a month.
Annie,
The group you are looking at in the 65 on up group is mostly made up of Matures or the lost generation — those who were born either during the Depression or during the very early years of WWII. This is one of the smaller demographic groups just like those born from 1965 to about 1980 another period of economic downturn. Yes, the children of the baby-boom are a very large group, but they have to wait for their parents and in some cases their grandparents those in their 70’s to stop working before they can get a job and this baby-boom group goes from 1945 – 1964 making the youngest only 47. There is a lot of time here before they retire and if they are spending the last 15 years of their life mostly saving for retirement, paying off debt, or putting their children through school then they are not spending on the physical economy. Their children on the other hand would be spending on stuff more as they set-up first apartments/homes, buying clothes for work, getting their first new car — not used, and getting married and having children which adds even more expenditures to the economy. Even if this group did work from the beginning without having issues of finding a job, they are at a much lower wage then those who they replace when they first start working.
Yes, SSI does get better in the long run, but it is also based on immigration to keep birth numbers up. Right now we are at 2.1 births per female and there is a trend amongst educated women of 1 in 5 not having childrenas a choice. It has been hinted that we have 12 – 14 million illegals in this country, which is helping with the new baby-boom you are talking about. If you really want to have fun get the birth numbers per year from the Fed and watch age groups grow with both legal and illegal immigration and figure out where we will be if we do not grow as a nation. One could even question if part of the housing boom was not caused by the rise of illegals into apartments allowing more others to purchase housing and creating a false sence of housing need, which evaporated when jobs were lost, but I am not going there in this, but I have played with the numbers and I would remind people there are states with fewer people in them then the possible illegal immigrant total.
The issue here is… have you even lived in a small town where there are limited jobs? Where do the young work while their parent’s are working? Some work for their parents, but if there are mostly factory jobs those children who have prospects leave for an area where there are jobs. It is a symptom of what is called Brain Drain in the mid-west. If jobs are flat all over, then their are no places for the young to move to to work while they wait for their parents to retire. This puts off buying things until there is a steady job and that includes having children which then drops births even more. If you ask some people who are from the old Eastern Block where jobs are held by older people, what they think of old people they will tell you they need to die as they are a drain on society and hold on to jobs which force the young to emmigrate. This scares me as we have respect for the elderly here. Or at least I do — greatly. It is my belief that when we stop respecting the elderly, we will lose our humanity and become the ultimate “ME” generation and then you will not have to worry about SSI and demographics — there won’t be any SSI.
Simon,
History aside going back to Hamiton and Federal assumption of State Debt. A balanced budget amendment limits government to provide funds when needed as the safety net of last resort. If we put in an exemption clause, then it will be constantly broken basically making the amendment useless. We are better to elect adults who understand taxes are not free money to be handed to pet projects, but money that belongs to individuals. People need to realize government in a democracy is themselves and to ask can I do this myself without Federal Assistance. BUT we also need to understand there will always be issues of need like infrastucture and people who will need government help as a humane society. How much help people need often are determind not in times of properity, but in times when GDP would be down as you say. I am very much against a balanced budget amendment. What we really need are solutions as to why need for funds goes up and to let debt be a motivating force in finding those solutions.
A balanced budget amendment limits government to provide funds when needed as the safety net of last resort.
A problem I see here is that the safety net was made for and used/abused by the financial community in the name of the fountain of youth. A rather arrogant, proof and law are on our side bunch o bed fellows. That won’t listen to anyone else because we have tried everything, and if we can’t do it, then it can’t done mentality. Once their efficiency erodes and requires additional funding they turn to the law to finance themselves, and then decide who not to safety net. And until their numbers are diminished, their is no one who can overwhelm them to set up a middle class safety net to catch the falling elderly, rich or poor. Debt is their necessary evil to reproduce the species and throw crumbs meant to trickle down to, and trick, the unfortunate. The orignal plan was to finance the growing world economy and use that money to pay down our bills, but the inefficiency of the process tapped the profits and left only debt. There is a future solution, you just can’t imagine it.
Very nice. Thank you Mr Johnson.
The risk-adverse agenda of the extortionists is almost comical in its irony.
kc
Dan Palanza many like me think that book keeping was enhanced by computers. Perhaps if you explain the problem, those with some knowledge of the subject of book keeping would educate the rest of us.
The Big Argument for a Balanced Budget Amendment is: “Hey, you gotta and
I gotta balance _our_ budgets. Why should the Feds be any different?”
And this question has an “obvious” answer, but it has to be pointed out:
“Because a sovereign state is a C O M P L E T E L Y D I F F E R E N T
kind of economic entity from a household”. People who don’t
recognize this answer are, according to economics texts, committing the
Fallacy of Composition. (I had long thought “fallacy of composition” was
economics jargon, but I recently discovered that it goes back to Aristotle!)
Consider: a sovereign entity creates its own money and administers how
much of it there is. Can households do that? A sovereign entity can’t
save any money; it must spend everything that comes in. But households
can save. These are, for me, the two overriding reasons why sovereign
entities(aka national governments) are different from you and me. But
there are many others, as the Membership here will of course recognize.
Mr Johnson gives many good technical reasons why the BBA amendment
isn’t a good idea. I hope that he can band together with other economists
and financial experts to start an economics literacy program for Americans.
For I believe that all economists, no matter what their beliefs about what
the national government should or should not do, can agree that “a
sovereign state is a _completely_ _different kind of economic entity from
a household.”
Best wishes,
Alan McConnell, in Silver Spring MD
Carla personaly this president is more dangerious than the tea party or Koch Brothers. This debt crisises was created by Obama; not sure the purpose it served, but it was not the majority of citizens.
Carla not saying he caused the actural debt.
@ bmz
I apologize if I came across as a crass know-it-all. My point of contention has nothing to do with religion but on empirical data only (forget about the contemporary historical authors of the time,… for their personal bias is obvious). If you go back to President L.B.Johnson (a democrat) and the “New Society” – it was he, that began the raiding of the SSI-Trust Fund, and created simultaneously a Medicare Program which was masked as a supplement in its genesis from the SSI-Trust Fund, thus helping to pay for the Viet`Nam War as a second well thought out entry book-keeping scheme as a inexpensive endeavor? Remember this,… it was he who cracked the code of the “Third-Rail” because of an ill-gotten war (sound familiar)! JMHO
Please reference the link above – esp. “The Myth of Bill Clinton Surplus”
PS. President Johnson a democrat was the first to write IOU’s for SSI-Trust Fund, and thus it became a presidium. Ironically, the strategic blueprint has enabled President Obama to further sever the “Third Rail” to pay for “Ill-Gotten-War’s” 40+ years later. This travesty has been proliferated by both parties ever since, but it was the least conspicuous party of the people that drove the nail!
http://www.craigsteiner.us/articles/16
I think our governments time would be better spent worrying about my balance sheet (and all the other little people like me) in order to fix the problems in our very inefficient economy.
The idea is, if you solve my problems the big banks could be allowed to fail.
My debt-to-income ratio is fairly good despite my middle-class wages with a family of four. My growth is stagnate since my wages have been frozen but I have taken “austerity” measures. I have taken all the actions available to me to mitigate the possibility of loss. In the event of my death, my family would not suffer financially for quite a while. There is one product, one more action I would like to take that would safeguard my financial security but I am unable to, because our ‘free-market economy’ doesn’t off it. Even though I am willing to shell-out quite a bit of money to buy it.
That product is an insurance policy to protect me in the event of unemployment due to my employer going bankrupt or moving/closing the factory I work at and not continuing my employment. I would like the policy to pay me 3 to 5 times my salary in a lump sump–tax free– in the case of the unlikely events I have described. The term would be until I reach eligible retirement age. If I am fired or leave the company, of course, the policy wouldn’t pay.
In exchange for an affordable premium, I want my government to protect the insurance company against loss. In other words, if unemployment goes to 40%, the US government will make sure money is available to help the insurer make good on the policies.
Bottom line here is, unemployed workers who have bought such a policy will have a reinvigorating effect on the economy in case of financial melt-down created by large banks behaving irresponsibly.
Now the big banks can fail and if unemployment reaches record levels, the stimulus money–an insurance policy bought by millions of individuals–can get to the hands of the people who need it, deserve it, and, who will spend the money to keep the economy going.
If I, and most of my fellow citizens situated like me, had an insurance policy as I have mentioned here, we could let the big banks fail, in my opinion.
And, I would sleep better at night not worrying too much about whether or not my employer will move my plant to a low-cost region, or worse, the CEO just take all the profits for himself and shut the doors on the factory.
I find it puzzling that no such policy exists. After all, there is a good profit to be made off my fear of job loss. Practically every other risk I face can be insured against.
How is that a complex financial instrument can be worthy of a credit-default swap issued by AIG, but I can’t buy further protection, a job-loss term policy, for myself in order to protect my financial health?
Far too much attention is being paid to the big players but the little players like me are the ones that can be used to eliminate the large economic risks we face. My debt and debt-to-income ratio is much more important the what is currently being discussed in Washington.
Earle,
There was no significant SS trust fund until Reagan increased payroll taxes substantially to offset his substantial decrease in income taxes. The alleged purpose of the increase was to create a sufficient trust fund to pay for future retirements–but he used it to subsidize lower income taxes. “The Myth of Bill Clinton Surplus” fully supports what I have said: that the Clinton surplus was made up entirely of excess payroll taxes building up the trust funds. Moreover, it shows that Bush’s first big lie was that he wanted to return the “surplus” to the taxpayers (of course, the WRONG taxpayers). My conclusion remains: ” By doing this, Bush guaranteed that taxes would have to be raised in order to amortize the trust funds. The failure to do so simply permits the Republicons to steal the money contributed by workers for their retirement. Everything about not raising taxes or limiting expenses[including the balanced budget amendment], is about stealing our money.”
Earle (cont): your allegation that the Democrats are every bit as much at fault as the Republicans, is wrong. Every Democratic president has attempted to increase income taxes to pay back the money taken from the trust funds; every Republican president has lowered income taxes in order to further steal money from workers retirement funds. Moreover, every Republican candidate for president today supports stealing workers retirement funds to subsidize income taxes.
“The language currently proposed would, as part of the “balance”, limit federal government spending to 18 percent of Gross Domestic Product (GDP), subject only to a potential override by a 2/3 majority in both houses of Congress”
How is federal government spending defined? Are expenditures handled through the tax code, eg mortgage interest deductions, carried interest etc, included? If not, does not this provide a mechanism to distort the whole issue?
@Brenda “The group you are looking at in the 65 on up group is mostly made up of Matures or the lost generation — those who were born either during the Depression or during the very early years of WWII.
They make up an EIGHTH of the total population in the USA – and may bump up for a few years to a tenth, at most. They were the PRODUCERS, and yes, continue to be! They created *jobs* that the previous generations – their parents and grandparents – did not have.
It’s 2011. Subtract 65 from 2011. 1946.
People, no matter what age, have the same basic needs for life-maintenance – air, water, food, shelter.
Your analysis is predatory and classic babushka busybody.
BMZ is on target – you are only interested in finding a way to take the fruits of someone else’s labor and you are doing it by focusing on age groups.
Sorry, I am a Town Planner these are facts in the rural midwest and places in Europe and Japan — it is my real life job you are playing with. As for being a babushka, I am either a solid Gen x or a boarder line Baby Boomer. Keep it civil girl.
@Dan P
I’m still with you about the accounting issue.
Looks like we have a place to start – the household *budget* is not the same as the country’s budget.
I’m not allowed to print money and issue it as *debt*.
Simon, I completely agree, not just for the reasons set out here, but also because of the fact that this opens an entire new vista for those elitists who want to destroy America and rule the globe by economic dominance. We do need a Constitutional Convention, but not for the purposes of creating a bogus balanced budget amendment. We need one to revise the election laws: (1) get rid of the Electoral College as antiquated and inappropriate; (2) assure that all elections are publicly funded; (3) outlaw and dismantle national political parties as absurd constraints on freedom of ideas and truth. Also the convention could be used to effectively limit lobbying to certain numbers, establish term limits, eliminate the revolving door between Capitol Hill and K Street, etc. There are lots of sensible changes to be considered, that is BEFORE the US devolves into an Arab Spring kind of chaos, which seems not so far away. Of course, alternatively, those who we elected to represent us could actually turn to the job of effective governance to care for the public weal, that is, of course, if they actually remember how to do this (if they ever knew).
@beene said: “Dan Palanza many like me think that book keeping was enhanced by computers. Perhaps if you explain the problem, those with some knowledge of the subject of book keeping would educate the rest of us.”
The problem is that there seems to be no knowledgeable persons today, relative to the subject of a proper double-entry book-keeping framework of rules that has bridged the gap between well ordered paper driven systems of old, versus electronic attempts to-date. Book-keeping is a natural phenomena. Every plant and animal must do a form of book-keeping if they are to survive from season to season, by having a way to recall their experiences in order to refine future goals. What’s more, the process is still book-keeping, as each species survives from one generation to a next, and a next, by adaptation.
A proper Book of Accounts, for starters, has a complete audit trail. I have not seen a software driven book-keeping method that has a proper audit trail in fifty years. Yes, computers are extremely capable of enhancing book-keeping, but it is not happening. My comment is designed to bring this sad state of affairs to the attention of knowledgeable persons such as Simon and James.
Also, I would welcome any evidence one may know of that I am incorrect on this point.
A balanced budget amendment makes no economic sense, for the reasons Simon indicates and more. Unless there were large loopholes making it an ineffective instrument against a buildup of public debt, it would require pro-cyclical moves by the federal government: cutting spending or raising taxes in a recession, which results in a reduction of aggregate demand, or increasing spending or cutting taxes during a boom, which could create inflationary pressures. We shouldn’t forget what happened in 1937, when premature austerity just as the economy was recovering brought on a second bout of depression.
Both fiscal and monetary policy can be effective tools to fight macroeconomic maladies. We currently suffer from the fact that monetary tools are pretty much exhausted, with short term interest rates near zero and QE over. If, in the future, fiscal policy were also off the table, we would have even less ability to respond to a crisis.
The idea that government spending should be capped at just 18% of GDP opens yet another can of worms. It represents an ideological fetish by conservatives more than a considered opinion of economists. In developed economies, public sector spending typically runs at more than twice that figure. David Miles, a respected economist at the Bank of England, points out there is no strong statistical link between economic growth and the share of government spending in GDP. “Bad government, not necessarily big government, is what damages a country”. What matters is how revenues are raised, not how much is raised etc. (c.f. David Miles and Andrew Scott, MACROECONOMICS: UNDERSTANDING THE WEALTH OF NATIONS, Wiley, 2002, pp. 280-283)
The argument for a balanced budget is that, though public debt accumulation is dangerous, politicians have little short term incentive to cut spending. The losers from spending cuts are readily identifiable and easily mobilized, though the gains from fiscal probity are more abstract and not something that politically articulate groups can easily rally around. Bond market sentiment can sour very quickly, but it takes a long time to right the fiscal ship of state. Thus it is a good idea to take the issue out of politicians’ hands.
This argument might be plausible in some ways. However, in the USA, the fiscal problem has been created less by politicians seeking to buy clients and supporters with new government programs than by those promising low taxes or tax cuts. It isn’t mainly new programs that drive deficits, but the mismatch between existing tax levels and the exploding costs of medical care in the hybrid US public-private health care system. BBA plans to include a California-style “supermajority” requirement for raising taxes would only compound our problem. The nation as a whole could see the total government gridlock and dysfunction that has plagued California for years.
Americans should remember a bit of their recent political history and see how there is quite a gap between what politicians say and what they actually do.
Republicans for decades have been decrying “big government”, only to pursue big government policies once in office. Ronald Reagan decried Carter’s small budget deficit when he ran against him in 1980. But Reagan presided over a doubling of the national debt. (cf. Benjamin Friedman, DAY OF RECKONING: THE CONSEQUENCES OF AMERICAN ECONOMIC POLICY UNDER REAGAN AND AFTER, NY: Random House 1988 p. 19). George W. Bush, another conservative, began with a budget surplus and left a $1 trillion deficit. The public should probably assume that, without a BBA, whenever conservatives have power, the public debt will rise because they will always cut taxes, whatever the fiscal consequences. A BBA would probably leave out war spending, in keeping with conservative tastes for combat; but they would not propose higher taxes to pay for it in the future. They will always assume that more cuts are in order, just as lower taxes are always in order. The tax take is currently at a record low of about 14 % of GDP, and they are seeking to lower it even more.
The truth is, we need politicians who will speak the truth to the American people. We need politicians who will not assure them that we can afford every type of new government program. But we also need politicians not to promise low and ever falling taxes, and not to argue demagogically that domestic programs can always be safely cut. We need to have adequate tax revenues to run such a large and complex society, and our marginal tax rates are already some of the lowest in the developed world. The problem is that politicians who would speak truthfully about taxes to Americans tend to get punished at the polls. That happened to Walter Mondale in 1984, when he said that taxes would have to be raised. That also happened to George H. W. Bush, when he broke his foolish “read my lips” pledge in 1992. We did manage to get from deficit to surplus in the 1990’s, but only because we raised taxes (though mostly the turnaround was due to faster growth). The politicians who helped us get into a better fiscal position were punished at the polls, while those pushing an irresponsible tax policy got rewarded.
We also should think twice about whether “big government, a feature shared by the most advanced and prosperous societies ever known, is really such a bad thing. We live in an era of bigness. If we don’t want to be overwhelmed by mega corporations then we need a big government to hold them in check. Government is accountable to the voters; corporations only to shareholders (and even to them only to a limited extent). We are living in the 21st century, not in some idyllic Jeffersonian 18th century agrarian paradise. Shrinking government in the way the tea party now contemplates would make our society less democratic, not more so.
@Anne said: “I’m still with you about the accounting issue.
Looks like we have a place to start – the household *budget* is not the same as the country’s budget.
I’m not allowed to print money and issue it as *debt*.”
Your deeper question here Annie, as I see it, asks: “What is a monetary system.”
Traditionally, monetary systems play the role of a neutral medium of exchange. The dollar today is the reserved currency, worldwide. The stock market, worldwide, has just dropped by a large percentage of its previous market price. One would be a fool to surmise that bankers and hedge funds worldwide are not playing this grand move short. In so doing, they create dollars that are not earned by the creation of products and services that have economic value. Now if they take that supposed profit and purchase U.S. Treasury bonds, we the people owe them the money they have put into circulation via gambling bets.
I would like someone to explain why the citizens of the U.S. must guarantee the winnings of gambling bets that created dollars out of the blue because the brokerage houses that are selling stocks and bonds are using the U.S. Dollar as their gambling chips. They have nothing to lose, while, in turn, they hire skilled gamblers to join in on the betting and split the winnings of U.S. Dollars between their hired hands and themselves.
A monetary system is tricky business. It needs the technology that only a proper book-keeping framework of rules can supply. Should Simon and James decide to make book-keeping a topic of discussion, they will be quite surprised by the value in its technology.
Money talks and bullsh*t walks: this is why the rules don’t amount to much. The rules are already here.
The game is rigged. House wins, the rest of us stiffs lose. Everyday.
Until We The Peasants decide “enough”, not much is bound to happen that is remotely seen as “good”.
Well I guess with the S&P downgrade they should be taking the idea of fiscal responsibility more seriously and actually try attempt “austerity”. Things are not looking good.
@Singing : “Until We the Peasants decide ‘enough,’ not much is bound to happen…”
Not just ‘enough’ to decide, peasants better know a thing or two or wind up with righteous indignation misdirected into tea parties or neck tie parties where they knot each other instead, per usual. Try practicing democracy without a well informed electorate, impossible. We have succumbed to endemic failure to think rationally. Abetted by rampant disinformation, superfluous pop-information; the electronic Colosseum occupies much of our thoughts.
@ bmz
Ref: “National Taxpayers Union – History of Federal Individual Income Tax”
ntu.org/tax-basics/history-of-federal-individual-1.html
Ref: “Social Security Act Amendments – Medicare 1965” (5/11/2011)
http://www.classbrain.com/artteenst/publish/article_104.shtml
Ref: “Trust Fund Data – Actuarial Public ___ 1957 – 2010
http://www.ssa.gov/oact/STATS/table-423.html
Ref: “Legislative History of Social Security Act”
http://www.ssa.gov/history/law.html
This data I’ve provided is extremely important as to the coming flood-gate of attacks from the far-right & GOP to cut entitlements (never ever raising revenues by cutting the Obama/ Bush Tax Cuts!) because of the S&P downgrade.
PS. If anything it has given the Fed` cover,… knowing quite well that interest rates can’t remain at 0.12 % forever. This will be in JMHO a non-starter come Monday morning. A flash point fire that never FLASHED?
@Dan
Thanks for the lucid response – much appreciated.
From my personal experience, I could not get the data needed to know what to do next to solve the problem(s) because the data was so massaged, it was no longer *real*. I am positive that that’s the same case (*weird* data) in all other R&D organizations that don’t have the answers but continue bs-ing for funding…
So the good thing is, at least we know that the bankster numbers are vapor – so no need to waste time looking at their gambling bets….it’s crap(s) :-))
We’ve got trillions of dollars of “swords” to beat back into *ploughshares* – but bringing those swords back home depends on *oil* for transport – so can we use double entry book keeping to decide whether it’s worth it in the long run…? Considering the culture where the stuff will be abandoned – sooner or later since the OIL is a finite resource – A FACT THAT CAN’T BE IGNORED,
the ladies would start recycling tanks and missiles into architecture and cookware :-) – and maybe the men can take on using some of the stuff for infrastructure for water and sanitation…? We have to get them off the opium, though….much like we have to get everybody in USA with health care off their *depression* meds before anything happens.
Also, can we get some accounting plans in before October2011 event? We the Stupid need in-your-face-smarter-than-you PROOF of how to get things done as the set-up for firing incompetent *elected* politicians in D.C. and taking over the future…
Allow me a babushka busybody moment – did you read about the latest high end vacation spots in up state NY…? They’re plopping down thousands to spend some time in an area that is – get this – technology free! No electronics of any kind allowed…
Bottom line – USA does not do *delusional* well, at all…hence the exodus to a delusional free zone for a vacation….
Let’s try again,… http://www.ssa.gov/OACT/STATS/table4a1.html
http://www.ntu.org/tax-basics/history-of-federal-individual-1.html (1913-2011)
Thankyou Simon and James {fantastic post as usual :-)) }
Many thanks, Earle (in?) Florida, for your corrected URLs
posted in your “Let’s try again” message. The tables
contained are well worth study and thought by us all!
Alan McConnell, in Silver Spring MD
Money talks and bullsh*t walks: this is why the rules don’t amount to much. The rules are already here.
The game is rigged. House wins, the rest of us stiffs lose. Everyday.
Until We The Peasants decide “enough”, not much is bound to happen that is remotely seen as “good”.
I agree, the root of the cause is riding around with the black top down, and the radio on. Nobody looked any finer, they are more of a hit at the parkway diner, but who ever knew we could want more than that out of life. Ohhh, and thats all i know about cut, cap, and balance tonite.
I don’t have the background in economics to know if a balanced budged is workable, but I see the question whether there should be a constitutional amendment in other terms. The United States, it seems to me, plays a unique role today. First of all we stabilize the power relationships between nations with our enormous military expenditures. Second, we help other nations develop economically by opening our markets to them even where that results in large deficits. Someone ought to be doing these things, and I guess it’s as a result of the 2nd world war that it fell to us. A constitutional amendment would be saying that we are no longer willing to be that leader. It’s essentially an isolationist position – a strange thing to be coming from the Republican party.
@Brenda – “….If you ask some people who are from the old Eastern Block where jobs are held by older people, what they think of old people they will tell you they need to die as they are a drain on society and hold on to jobs which force the young to emmigrate….”
This is GOSSIP, Brenda. And that is never *civil*. And it is “emigrate” – only one “m” – but no prob, your finger might have twitched because of the righteousness you were feeling about your viewpoint….
B, “…Sorry, I am a Town Planner these are facts in the rural midwest and places in Europe and Japan — it is my real life job you are playing with. As for being a babushka, I am either a solid Gen x or a boarder line Baby Boomer. Keep it civil girl….”
You are DELUSIONAL if you perceive I am “playing” with your job – yeah, Brenda, it’s all about YOU.
As a Public Servant you MUST have a proper sense of “you are here”. YOU are in the United Stares of America. TOWN PLANNERS are giving the go-ahead for banksters to bull doze foreclosed properties….only in a WAR would the job of a “town planner” be on the chopping block if you don’t give permits to banksters. Wake UP.
So what happened to the whole Gen X SELL of live anywhere in the country and telecommute to Wall Street via Verizon 4G speed…?
and I think you meant “borderline”, what’s “boarder line”…?
Which reminds me – this SHOULD interest you more than Russian Ashkenazi gossip – Brokaw is doing a DOCUMENTARY special on how small towns in USA have 44% of their people in USA military (NOT mercenaries) compared to the % from *elite* small towns – which is 0%…
So not all small towns are the same and, yes, I lived in one for 7 years….in Arizona. But that is a whole other story….yes they do shoot women in the head just like in Pakistan….
@myshkin: (love your handle, BTW): “Not just ‘enough’ to decide, peasants better know a thing or two or wind up with righteous indignation misdirected into tea parties or neck tie parties where they knot each other instead, per usual. Try practicing democracy without a well informed electorate, impossible. We have succumbed to endemic failure to think rationally.”
Very well said and indisputable. But here’s the thing, myshkin: the Koch brothers and their political advisors anticipated ALL of this, and created and FUNDED the “Tea Party” to obfuscate, confuse and confound the American public. And a masterful job they have done of it, too: co-opting any rational basis of revolt against the oligarchs by throwing up this conservative bulwark of “revolutionaries.”
Of course, Obama and the Democrat party are playing right along with them: a perfect storm of naked Emperors.
What we need is the “nothing left to lose” party. Shouldn’t be that hard to recruit. After all, at least 45 or 50 million Americans are there already, and probably another 100 million can see the storm gathering above their heads. And my numbers may be conservative.
“A Balanced Budget on Revenues or Outlays?”
Just recently President Obama comes out with another brainstorm wrapped in the “American Flag” to help returning Vet’s,… the ability to get back into the workforce with a fantastically generous “Tax Credit Package” over a 2 year period totaling a whopping $120 ml – WOW!
Let’s start with the “Foreign Aid”, and its Chairman of Foreign Relations Committee, the honorable US Sen. John Kerry (Dem/ Ma.- 30 yrs, and going for 36[?]) who profoundly thinks in all his great wisdom [pathetic] that ~1.2% of the “Total U.S. Outlays Budget” is miniscule? Were talking about ~ $40 +/+ Billion annually!
Now – Let us delve into the mind of Kerry,… the Omnipresent “Big Daddy Warbucks” of the 21st century. Indeed, this globe trotting carpetbagger scowering the unknown corporate world
with a duffel bag filled with graft, and gift-wrapped gratuitous ($$$) free handout, on behalf of K-Street and Corporate America,… all on the american taxpayers dime. How quaint? This non`sequitur linquistic lexicon, and obviously dyslexia surogate philanthropist,… this lapdog ignoble muckrake sparring with x-rated picaresque is nothing more or less than a “DC Drug Mule”! JMHO
Think about the ironic exceptionalism of the arcane political leaders regarding the Tea Partier’s and the Grand old Party (GOP) boy’s club and the so called spread between our “People’s Party (Dem’s) closure over the last 50 years and how the differential is now but a taint!
Finally – We want to cut, cap, and balance the budget (revenues?) with a ridiculous amendment in which our mind’s have been shuttered by our poisonous leaders?
A Whopping $120 Million is a slap in the face to our “Proud Veteran’s”, and yet the MSM & DC plays it up as, “Wondebar”! Pathetic,…simply pathetic,…
Thankyou Simon and James for your great digging and blog bringing to light these important matters for “America’s Sake”!
the average of the last forty years equals what % of GDP we should have as federal spending
it would make more sense to just pass a law against the future
@ Carla – “What we need is the “nothing left to lose” party. Shouldn’t be that hard to recruit. After all, at least 45 or 50 million Americans are there already, and probably another 100 million can see the storm gathering above their heads. And my numbers may be conservative.”
Really think about what you said, Carla. I’m not disputing the numbers – I mean, taking into consideration that the math wizzies made a 2 Trillion $$$ error in their calculations, what’s a couple of million in either direction?
That is a country BIGGER than the one trying to *balance the power* between countries by employing Orcs.
Just because we are ready to deal with Orcs coming proves the INSANITY of *globalism*….
Are you still suggesting that attempting to steal from 150 million people ala one database with *weird programing* is NOT Nihilism?
When they corrected the 2 Trillion math booboo – does every single person in Iceland still owe 25 million?
@AIR – “First of all we stabilize the power relationships between nations with our enormous military expenditures. Second, we help other nations develop economically by opening our markets to them even where that results in large deficits.”
The tragic, fatal error made in stabilizing the power relationships between countries was identified and addressed in the “Mr. Y” analysis (an analysis which INSANE censorship of the internet through Orc-generated noise has buried). You don’t go into countries who have not been stabilized through an agricultural age and empower the depraved and degenerate “strong man” with weapons and a holy book written during psychotic episodes – “….this is what the Big Giant Head is channeling through me today…”.
Like, duh.
Everyone bought the Chinese junk at Wall Mart – and so how’s it going internally in China now that it’s obvious that the $$$ is not being distributed enough to the producers so that they can afford what they manufacture? They are not able to feed themselves like they used to because of the pollution.
And finally, how logical was it to soldier on with all this grandiosity based on CHERRY-PICKED DATA?
Here’s the math – since USA is providing 3 Billion a year in aid to a country of 8 Million people, how much wealth is slated to be stolen from 50 million permanently unemployed people in USA?
How much from Greece, Portugal, Ireland, Iceland…?
“Austerity” for everyone else in Western Civilization because we are all living beyond our means while 8 million people steal 3 Billion A YEAR from just one country?
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(1)
Analysis of Financial Terrorism in America
By David DeGraw, AmpedStatus Report
http://ampedstatus.org/exclusive-analysis-of-financial-terrorism-in-america-over-1-million-deaths-annually-62-million-people-with-zero-net-worth-as-the-economic-elite-make-off-with-46-trillion/
(2)
Is the SEC Covering Up Wall Street Crimes?
By Matt Taibbi
August 17, 2011 8:00 AM ET
http://www.rollingstone.com/politics/news/is-the-sec-covering-up-wall-street-crimes-20110817
(3)
Daylight Robbery, Meet Nighttime Robbery
Naomi Klein
August 16, 2011
http://www.thenation.com/article/162809/daylight-robbery-meet-nighttime-robbery
OPINION:
Don’t play with the amendments process…the wrong people are fully in command and the system is already captured. It will predictably become a fiasco of suppressive mandating.