Balanced Budget Amendment Sounds Good in Theory, Devastating in Practice

Jul 12, 2011

By Abigail Newcomer and Elizabeth Kenefick

"Few ideas are more seductive on the surface and more destructive in reality than a balanced budget amendment"

- Norman Ornstein, American Enterprise Institute analyst

The idea of amending the constitution to require lawmakers to balance the federal budget is not new. In recent decades, it arose a number of times as a "no nonsense" solution to curb government spending. However, each time Congress evaluated this proposal on its merits, it determined a balanced budget amendment is better in theory than in practice. And it is an especially bad idea during periods of economic decline because it would devastate public programs that support individuals at the very times when their salaries and hours decrease or their jobs disappear. Despite this knowledge, the Senate and the House are scheduled to vote on balanced budget amendment proposals in their respective chambers next week.

A constitutional balanced budget amendment would require total federal spending not exceed total revenue collected. This creates a mismatch, given that revenue may contract during an economic downturn while, simultaneously, need for public support and federal investment to stimulate the economy increases. Programs such as the Supplemental Nutrition Assistance Program (SNAP), Medicaid, Temporary Assistance for Needy Families (TANF), and Unemployment Insurance are designed to support families during times of need, stabilizing or offsetting their economic instability. These programs are considered "automatic stabilizers" because individuals become eligible for them as their incomes decrease.  As more people become eligible, overall spending increases to meet the demand.  During the recent deep recession, these programs responded appropriately to increased need. The programs would not have been able to do so if the nation had a constitutional balanced budget amendment because there would have been no room in the federal budget for necessary, increased spending.

The balanced budget amendments currently being considered (H.J. Res. 1 and S.J. Res. 23) would limit total federal spending to 18 percent of Gross Domestic Product (GDP) per year.  Federal spending as a percent of GDP hasn't been that low since 1965, an era that preceded Medicaid and Medicare and important expansions in national security, health care, education and other critical programs that provide support to Americans at every income level.  Even the quite severe Ryan House budget resolution would not reduce spending to this level until after 2040. To reach these spending caps, much more severe cuts, such as  those proposed in the draconian Republican Study Committee (RSC) budget proposal, would be required. The RSC plan would cut funding for non-defense discretionary programs by approximately 70 percent.  It would implement a spending cap that would apply to every domestic program established to meet the needs of the most vulnerable among us.  The true impact of this proposal is demonstrated by the Center on Budget and Policy Priorities, which has drawn up estimated cuts calculated assuming that all programs would be subjected to the cap at the same rate:

  • Medicaid, SNAP and the Supplemental Security Income (SSI) would all be cut in half in 2021.
  • Medicaid and CHIP would be cut more than $1.1 trillion over the cap's first six years
  • SNAP would be cut by $153 billion over six years.
  • The Earned Income Tax Credit would be cut by nearly $100 billion over six years
  • Pell Grants would be cut by $140 billion over six years

A balanced budget amendment is seductive, because it allows politicians to support fiscal responsibility without identifying the actual cuts that would have to occur. However, such an approach would restrict federal spending during times of economic decline, precisely when the American economy and Americans themselves need a boost from their government. This would not only inflict deep hardship on millions of American families, but would also deepen and accelerate economic cycles, turning downturns into recessions and recessions into depressions.  Congress and President Obama should reject this dangerous appeal.

 

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