Commentary Magazine


No Way Around Entitlement Reform

Should the federal government’s balance sheet be treated the way a family approaches household finances? That’s the question at the heart of the renewed debate over Paul Ryan’s budget, President Obama’s spending, and the idea of balancing the federal budget. Conservatives argue that keeping a balanced budget is a basic expression of fiscal responsibility, and they point out that states have balanced budget requirements. Whether this makes it more or less compelling for the federal government to have a balanced budget requirement is up for debate, and the New York Times offers an in-depth survey of economists and experts on what the president derides as balancing the budget for its own sake.

Republicans seem to think that balancing the budget is a good political message to get behind, but they should be wary of how reasonable the other side comes out in stories like today’s Times piece, and they should also take into consideration the sometimes perverse unintended consequences of some efforts to force a balanced budget. Here is how the Times summarizes the two views:

As sensible as a balanced budget might sound — much like a balanced checkbook for a family — countries are generally able to run modest deficits for years on end while still keeping debt stable as a share of economic output. One year’s deficit is effectively paid off by later economic growth, especially if a government is investing in public goods like roads and schools….

“It is important to reduce the debt, and balancing gets you there faster,” said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and a prominent Republican economist. “That’s paramount.”

He said a balanced budget is a goal everyone could understand. “It gives Congress a way to say no,” he said. “Transparency and political buy-in are important, and people understand balanced budgets. It has a lot of virtues.”

Having a balanced budget is one thing; how you get there is quite another. And this is what makes the conservative position more of a challenge than would first appear. There are two ways, essentially, of bringing the government’s budget into balance under current conditions, and they both contain pitfalls conservative politicians should be aware of. One way is via a balanced budget amendment. This has been part of the House GOP’s agenda for the last few years, and the argument for it basically echoes what Holtz-Eakin told the Times above: it forces the government’s hand.

But just as conservatives often lecture liberals on the unintended consequences of economic policy, they should take as a warning signal the unintended consequences of state balanced budget amendments. In New Jersey, for example–though this practice is not confined to the Garden State–the state government has to work with debt limitations and balanced budget requirements, and simply utilized accounting tricks that are becoming increasingly popular to get around them. As the Mercatus Center points out:

While the New Jersey Constitution’s debt limitation clause restricts borrowing by requiring voter approval, the New Jersey Supreme Court has permitted broad exceptions to this rule, allowing the state to issue debt through independent authorities and to use debt to balance the state’s operating budget.

In at least 33 states, independent authority debt has become more common in recent years as a source of financing capital projects, emerging as a “particularly blatant evasion” of debt limitation clauses contained in state constitutions.

That doesn’t preclude the possibility that a balanced budget amendment can be designed to be airtight–but that brings up another obstacle. An airtight balanced budget requirement could enable the growth of entitlements and other popular spending by telling the government that they absolutely must raise taxes to meet budget demands. Such an outcome would be the worst of both worlds.

But that brings us to the other way to balance the budget: the old-fashioned way, by simply spending responsibly. The challenge here is twofold: first, it does not have the enforcement mechanism the amendment would (hopefully) have. And second, the Senate is controlled by the Democrats and President Obama still has no plans to dramatically cut spending. Entitlement reform is necessary, but it’s also easy to demagogue. As President Obama has made all too clear, if the Republicans want to reform entitlements, they have to control Congress and the White House; they won’t have any help from Democrats who are always thinking about the next election.

It is not, as the media and Democrats love to pretend, ideological extremism or Randian heartlessness to want the government to spend within its means and keep a balanced budget. But conservatives are going to have to win the public’s support for entitlement reform to get there. The debate over the balanced budget may prove to be a detour, not a shortcut.

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