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.