Balanced Budget Amendment the answer? Boozman says yes, Pryor no, Part 34 (Input from Dan Mitchell of the Cato Institute Part 6)

Classic Ron Paul: “I expect deficits to explode, not come down”

4/9/1997, C-SPAN

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Steve Brawner in his article “Safer roads and balanced budgets,” Arkansas News Bureau, April 13, 2011, noted:

The disagreement is over the solutions — on what spending to cut; what taxes to raise (basically none ever, according to Boozman); whether or not to enact a balanced budget amendment (Boozman says yes; Pryor no); and on what policies would promote the kind of economic growth that would make this a little easier.

Dan Mitchell wrote a great article called “Why a Tax Limitation/Balanced Budget Amendment is Needed to Control Spending,” Cato Institute, Feb 19, 1997. I will be posted portions of that article the next few days. Here is the sixth portion:

How Soon Would a Balanced Budget Amendment Take Effect?

Before a balanced budget amendment can take effect, it must clear two major hurdles. First and foremost, it must obtain two-thirds support from both houses of Congress. Should this occur, the amendment would be sent to the states for ratification. To become part of the Constitution, it would need to be approved by both chambers of three-fourths, or 38, of the state legislatures.4 If an amendment is approved by Congress and ratified by the necessary number of state legislatures, there probably would be a grace period of two years between ratification and actual implementation. Many supporters would like to time the amendment to take effect in 2002 because that is the target date for balancing the budget, but the actual timing will depend on overcoming the obstacles that exist.

Would the Amendment Solve America’s Economic Problems?

A balanced budget amendment does not guarantee sound economic policy. All it does is make it difficult for politicians to finance their spending by borrowing money. Supporters of the amendment believe that restricting debt will result in smaller government, and scholarly evidence demonstrates that the economy will grow faster if the size of government is reduced.5 It is also possible, however, that a simple balanced budget requirement could lead politicians to finance their spending through higher taxes. Such financing policies almost certainly would dampen the economy’s performance. Moreover, because of lower incomes, lost jobs, and reduced profits, tax increases have never generated the amount of new revenues that politicians expected;6 thus, a balanced budget amendment could trigger a dismal cycle of more taxes, followed by more debt, followed by more taxes, followed by more debt, and so on.

For this reason, requiring a supermajority in order to raise taxes to balance the budget is critical. More specifically, a supermajority means there would be no bias in favor of tax-financed spending, and the likelihood of a continuing spiral of taxes and debt would be greatly diminished.

To be fair, the constitutional majority requirement in the amendment proposed by Senator Craig and Representatives Stenholm and Schaefer could require a supermajority of those voting if some members are absent. For example, 51 votes would be required in the Senate even if only 90 Senators were available to cast their votes. In this case, for instance, a tax increase would need the approval of 57 percent of Senators present. This also would be true in the House, where passage would require 218 votes. The problem with a “constitutional” majority to pass tax increases, however, should be clear: If all Members of Congress were available for a vote, a tax hike could pass with a simple majority.

Would a Balanced Budget Lead to Lower Interest Rates?

Some proponents of a balanced budget amendment argue that eliminating the deficit would lead to dramatic reductions in interest rates. The scholarly research,7 however, indicates that these claims are, at best, greatly exaggerated. Although it is almost certainly true that reductions in government borrowing will put downward pressure on interest rates, it appears that the impact is too small to measure. Simply stated, in world capital markets in which trillions of dollars exchange hands every day, changes of $30 billion, $40 billion, or $50 billion in the U.S. budget deficit are not large enough to make a measurable difference.

This can be seen by comparing interest rates and budget deficits over the past 20 years. During this period, budget deficits have experienced significant shifts up and down with changing fiscal and economic circumstances. As Chart 4 illustrates, however, interest rates do not respond as the theory predicts. Indeed, instead of rising when deficits increase and falling when deficits decline, the opposite seems to be the case. This does not mean that higher budget deficits lead to lower interest rates; it means simply that other factors, such as monetary policy, tax policy, and overall demand for credit, are much more important than shifts in the U.S. budget deficit.8

End Notes:

  • Nebraska has a unicameral legislature.
  • See Kevin Grier and Gordon Tullock, “An Empirical Analysis of Cross-National Economic Growth, 1951-80,” Journal of Monetary Economics, Vol. 24 (1989), pp. 259-276; see also Robert Barro and Xavier Sala-I-Martin, Economic Growth (New York, N.Y.: McGraw-Hill, Inc., 1995), p. 494.
  • For more detail on flaws in the current revenue-estimating process, see Daniel J. Mitchell, “How to Measure the Revenue Impact of Changes in Tax Rates,” Heritage Foundation Backgrounder No. 1090, August 9, 1996.
  • Charles I. Plosser, Further Evidence on the Relation Between Fiscal Policy and the Term Structure (Rochester, N.Y.: University of Rochester, 1986).
  • For more detail on the lack of a relationship between interest rates and the deficit, see Daniel J. Mitchell, “Taxes, Deficits, and Economic Growth,” Heritage Foundation Lecture No. 565, May 14, 1996.
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