Milton Friedman on the Balanced Budget Amendment Part 2

Mark Levin “I feel that we can do great things.”

Uploaded by  on Mar 26, 2011

Mark Levin “I feel that we can do great things.” Mark is excited by the proposed Balanced Budget Amendment. He states that this would be a great thing for America to pass. He believes the Balanced Budget Amendment will help bring the nation back to it’s Constitutional roots. Mark explains what the amendment is and how it will work. In his February 1983 classic essay, Nobel Prize-winning economist Milton Friedman gives his opinion on a balanced budget amendment that requires a super majority to raise taxes. Friedman states, “The purpose of the balanced-budget-and-tax-limitation amendment is to limit the government in order to free the people—this time from excessive taxation. Its passage would go a long way to remedy the defect that has developed in our budgetary process.” Part #1 3-25-2011


The best article I have ever read on the Balanced Budget Amendment was written by my favorite economist Milton Friedman. Here is the second portion below:

Washington: Less Red Ink

I have been much more surprised, and dismayed, by the criticism that has been expressed by persons who share my basic outlook about the importance of limiting government in order to preserve and expand individual freedom—for example, the editors of The Wall Street Journal and a former editor and current columnist, Vermont Royster. They do not question the objectives of the amendment, but they doubt its necessity and potential effectiveness.

Those doubts are presumably shared by many other thoughtful citizens of all shades of political opinion who are united by concern about the growth of government spending and deficits. Here, for their consideration, are my answers to the principal objections to the proposed amendment that I have come across, other than those that arise from a desire to have a still-bigger government:

1. The amendment is unnecessary. Congress and the President have the power to limit spending and balance the budget.

Taken seriously, this is an argument for scrapping most of the Constitution. Congress and the President have the power to preserve freedom of the press and of speech without the First Amendment. Does that make the First Amendment unnecessary? Not surprisingly, I know of no one who has criticized the balanced-budget amendment as unnecessary—however caustic his comments on congressional hypocrisy—who would draw the conclusion that the First Amendment should be scrapped.

It is essential to look not only at the power of Congress but at the incentives of its members—to act in such a way as to be re-elected. As Phil Gramm, a Democratic congressman from Texas, has said: Every time you vote on every issue, all the people who want the program are looking over your right shoulder and nobody’s looking over your left shoulder….In being fiscally responsible under such circumstances, we’re asking more of people than the Lord asks.”

Under present arrangements, Congress will not in fact balance the budget. Similarly, a President will not produce a balanced budget by using the kind of vetoes that would be required. The function of the amendment is to remedy the defect in our legislative procedure that distorts the will of the people as it is filtered through their representatives. The amendment process is the only effective way the public can treat the budget as a whole. That is the function of the First Amendment, as well—it treats free speech as a bundle. In its absence, Congress would consider each case “on its merits.” It is not hard to envisage the way unpopular groups and views would fare.

2. The President and Congress are guilty of hypocrisy in voting simultaneously for a large current deficit and for a constitutional amendment to prevent future deficits.

Of course, I have long believed that congressional hypocrisy and shortsightedness are the only reasons there is a ghost of a chance of getting Congress to pass an amendment limiting itself. Most members of Congress will do anything to postpone the problems they face by a couple of years—only Wall Street has a shorter perspective. If the hypocrisy did not exist, if Congress behaved “responsibly,” there would be no need for the amendment. Congress’s irresponsibility is the reason we need an amendment and at the same time the reason that there is a chance of getting one.

Hypocrisy may eventually lead to the passing of the amendment. But hypocrisy will not prevent the amendment from having important effects three or four years down the line—and from casting its shadow on events even earlier. Congress will not violate the Constitution lightly. Members of Congress will wriggle and squirm; they will seek, and no doubt find, subterfuges and evasions. But their actions will be significantly affected by the existence of the amendment. The experience of several states that have passed similar tax-limitation amendments provides ample evidence of that.

3. The amendment is substantive, not procedural and the Constitution should be limited to procedural matters. The fate of the Prohibition amendment is a cautionary tale that should give us pause in enacting substantive amendments.

If this amendment is substantive, so is the income-tax (sixteenth) amendment and so are many specific provisions of the Constitution. The income-tax amendment does not specify the rate of tax. It leaves that to Congress. Similarly, this amendment does not specify the size of the budget. It simply outlines a procedure for approving it: the same as now exists if total legislated outlays do not exceed an amount determined by prior events (the prior budget and the prior growth in national income); and by a majority of 60 percent if total legislated outlays do exceed that amount. The requirement of a supernormal majority is neither substantive nor undemocratic nor unprecedented. Witness the two-thirds majority necessary to override a presidential veto or to approve a treaty.

The prohibition amendment was incompatible with the basic aim of the Constitution, because it was not directed at limiting government. On the contrary, it limited the people and freed government to control them. The balanced-budget-tax-limitation amendment is thoroughly compatible with the basic role of the Constitution, because it seeks to improve the ability of the public to limit government.

4. The amendment is unduly rigid because it requires an annually balanced budget.

This is a misconception. Section 1 of the amendment prohibits a planned budget deficit unless it is explicitly approved by three fifths of the members of the House and Senate. It further requires the Congress and the President to “ensure that actual outlays do not exceed the outlays set forth in [the budget] statement.” But it does not require that actual receipts equal or exceed statement receipts. A deficit that emerged because a recession produced a reduction in tax receipts would not be in violation of the amendment, provided that outlays were no greater than statement outlays. This is a sensible arrangement: outlays can be controlled more readily over short periods than receipts.

I have never been willing to support an amendment calling for an annually balanced budget. I do support this one, because it has the necessary flexibility.

5. The amendment will be ineffective because (a) it requires estimates of receipts and outlays which can be fudged; (b) its language is fuzzy; (c) the Congress can find loopholes to evade it; (d) it contains no specific provisions for enforcement.

(a) It will be possible to evade the amendment by overestimating receipts—but only once, for the first year the amendment is effective. Thereafter, section 2 of the amendment limits each year’s statement receipts to the prior year’s statement receipts plus the prior rate of increase of national income. No further estimates of budget receipts are called for. This is one of the overlooked subtleties in the amendment.

Any further fudging would have to be of the national-income estimates. That is possible but both unlikely and not easy. What matters is not the level of national income but the percentage change in national income. Alterations of the definition of national income that affect levels are likely to have far less effect on percentage changes. Moreover, making the change in income artificially high in one year will tend to make it artificially low the next. All in all, I do not believe that this is a serious problem.

(b) The language is not fuzzy. The only undefined technical term is “national income.” The amendment also refers to “receipts” and “outlays,” terms of long-standing usage in government accounting; in section 4, total receipts and total outlays are defined explicitly.

Nor is the amendment a hastily drawn gimmick designed to provide a fig leaf to hide Congress’s sins. On the contrary, it is a sophisticated product, developed over a period of years, that reflects the combined wisdom of the many persons who participated in its development.

(c) Loopholes are a more serious problem. One obvious loophole—off-budget outlays—has been closed by phrasing the amendment in terms of total outlays and defining them to include “all outlays of the United States except those for repayment of debt principal.” But other, less obvious, loopholes have not been closed. Two are particularly worrisome: government credit guarantees, and mandating private expenditures for public purposes (e. g., antipollution devices on automobiles). These loopholes now exist and are now being resorted to. I wish there were some way to close them. No doubt the amendment would provide an incentive to make greater use of them. Yet I find it hard to believe that they are such attractive alternatives to direct government spending that they would render the amendment useless.

(d) No constitutional provision will be enforced unless it has widespread public support. That has certainly been demonstrated. However, if a provision does have widespread support—as public-opinion polls have clearly shown that this one does—legislators are not likely to flout it, which brings us back to the loopholes.

Equally important, legislators will find it in their own interest to confer an aura of inviolability on the amendment. This point has been impressed on me by the experience of legislators in states that have adopted amendments limiting state spending. Prior to the amendments, they had no effective defense against lobbyists urging spending programs—all of them, of course, for good purposes. Now they do. They can say: Your program is an excellent one; I would like to support it, but the total amount we can spend is fixed. To get funds for your program, we shall have to cut elsewhere. Where should we cut?” The effect is to force lobbyists to compete against one another rather than form a coalition against the general taxpayer.

That is the purpose of constitutional rules: to establish arrangements under which private interest coincides with the public interest. This amendment passes that test with flying colors.

6. The key problem is not deficits but the size of government spending.

My sentiments exactly. Which is why I have never supported an amendment directed solely at a balanced budget. I have written repeatedly that while I would prefer that the budget be balanced, I would rather have government spend $500 billion and run a deficit of $100 billion than have it spend $800 billion with a balanced budget. It matters greatly how the budget is balanced, whether by cutting spending or by raising taxes.

In my eyes, the chief merit of the amendment recommended by the Senate Judiciary Committee is precisely that it does limit spending. Section 1 requires that statement outlays be no greater than statement receipts; section 2 limits the maximum increase in statement receipts; the two together effectively limit statement outlays. Moreover, if in any year Congress manages to keep statement receipts and outlays below the maximum level, the effect is to lower the maximum level for future years, thus fostering a gradual ratcheting down of spending relative to national income.

A further strength of the amendment is the provision for approving an exceptional increase in statement receipts (hence in statement outlays). The spending-limitation amendment that was drafted by the National Tax Limitation Committee required a two-thirds majority of both houses in order to justify an exceptional increase in outlays. The amendment passed by the Senate requires only “a majority of the whole number of both houses of Congress.” However, the majority must vote for an explicit tax increase. I submit that it is far easier to get a two-thirds majority of Congress to approve an exceptional increase in spending than to get a simple majority to approve an explicit increase in taxes. So this is a stronger, not a weaker, amendment.

Section 6 proposed by Senator Armstrong in the course of Senate debate, makes the debt ceiling permanent and requires a supermajority vote to raise it. That provision was approved by a narrow majority composed of a coalition of right-wing Republicans and left-wing Democrats—the one group demonstrating its hardcore conservatism, the other seeking to reduce the chances of adoption of the basic amendment.

I do not favor the debt-limit provision. Its objective—to strengthen pressure on Congress to balance the budget—is fine, and it may be that it would do little harm. But it seems to me both unnecessary and potentially harmful. I trust that it will be eliminated if and when the amendment is finally approved by Congress. I shall favor the amendment even if the debt-limit provision is left in, but less enthusiastically.

7. The amendment introduces a near economic theory into the Constitution.

It does nothing of the kind—unless the idea that there should be some connection between receipts and outlays is a new economic theory. The amendment does not even change the present budget process, if Congress enacts a balanced budget that rises by no greater a percentage than does national income. But it does significantly stiffen the requirement for passing a budget that is in deficit or for raising the fraction of our income spent on our behalf by the government.

The amendment recommended by the Senate Judiciary Committee deserves the wholehearted backing of every believer in a limited government and maximum freedom for the individual.

Milton Friedman received the Nobel Prize in economics in 1976. He is the Paul Snowden Russell Distinguished Service Professor Emeritus of Economics at the University of Chicago and a senior research fellow at the Hoover Institution at Stanford University.
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