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Honest Governance Requires Balanced Budgets

There’s hardly been a more opportune time to demand a Constitutional balanced budget amendment than after GOP’s record $4.4 trillion federal budget, which is set to generate deficits of $1-trillion in a year.

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Photo: TaxCredits/Creative Commons

It was thus surprising to come across distinguished free-market economist Walter Williams’ recent denouncement of a balanced budget amendment. To be sure, Williams hasn’t followed the conservative trend of becoming a spending and deficit promoter over night; he’s against the amendment because there exists better legislative ways to curb spending.

Most orthodox economists reject a balanced budget amendment because it restrains the fiscal policy of stimulating aggregate demand through deficit spending, especially during recessions. Williams, on his part, primarily opposes the amendment because it likely results in higher taxes.

This is a valid argument. Bearing in mind that two-thirds of federal expenditures is mandatory, the only realistic way America could balance its budgets is through tax hikes.

America’s three major entitlement programs — Social Security, Medicare, and Medicaid — consume the larger bulk of mandatory spending. Pension and healthcare expenditures will rise steeply under America’s aging population. Social Security’s Trustee Report estimates that America’s public pension system will be insolvent by 2034. According to the Treasury (FY 2016 Report, pp. 63), the combined unfunded liabilities of Social Security and Medicare is $46.7 trillion — three times the amount of federal debt held by the public.

Yet to date, there’s barely any political willingness to reform these entitlement programs, which have consumed an ever-increasing share of GDP since the development of the American welfare state in the sixties.

Cuts in annually appropriated discretionary spending are similarly implausible; ultimately, the disregard for America’s looming debt crisis is expressed in genuine bipartisanship on Capitol Hill. Republicans are eager to compromise with Congressional Democrats as long as the largest discretionary post, the inflated defense budget, keeps swelling.

In short, as long as tackling irresponsible spending levels remains a limited priority, Williams is correct that a balanced budget amendment would cause large tax hikes, which, at best, would only temporarily prolong unsustainable public programs.

Still Williams misses the mark when he denounces a balanced budget amendment.

His alternative proposal is to limit spending to a percentage of GDP, which is traditionally favored by free-market economists, including Milton Friedman. While this might be a better policy option, it is odd to reject a balanced amendment — which has been part of the conservative legislative conversation for decades — for its comparative minor imperfections.

More important, a balanced budget amendment cannot reasonably be criticized for compelling the government to pay for its expenditures directly through taxation when the only funding alternatives are indirectly through borrowing or, even worse, money printing. After all, Williams’ main point is that every penny the government spends is a cost on workers.

Hence, his caution against borrowing and money printing doesn’t seem to fully take into account that this is the inevitable method of covering deficits. Direct taxation is the least-worst way of financing government; as such, the risk of tax hikes is not a sound basis to oppose a balanced budget amendment.

To demonstrate his argument, though, Williams asks:

“Would we have greater personal liberty under a balanced federal budget with Congress spending $4 trillion and taxing us $4 trillion, or under an unbalanced federal budget with Congress spending $2 trillion and taxing us $1 trillion?”

Yet, this rhetorical question remains just that: rhetorical and speculative. Although the latter budget is preferable, the main driver of budget growth — an increase of $1.3 trillion since Obama’s first recession budget — is precisely the absence of legislative checks on deficit spending.

The only realistic way for more popular, and thereby political, demand for spending cuts is for people to experience the true cost of public programs through a straight bite off their paychecks. Governments, on the other hands, benefit from indirectly taxing its citizens — inflation and debt — because it conceals the actual cost of public spending.

The absence of balanced budgets legislation — not just spending restraints — results in worsening fiscal calamities manifested in a swelled debt burden on younger and future generations, added interest payments that’s extracted from GDP annually, and heightened risks of inflationary bubbles from easy credit policies and an expansionist money supply.

Regardless of policy alternatives, small government advocates should favor any legislative options that prevent the bleak consequences of the fiscal status quo.

In fact, ensuring that public services are paid for honestly should be in the interest of everyone, irrespective of political flavor.

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