Is a Balanced Budget Amendment Necessary?

August 6, 2011

G’Day!

Yes, the Constitutional Amendment is necessary given the dysfunctional behavior of our government, and No, it is not necessary (even undesirable) in economic theory because it limits the flexibility of our government. So what should we do??

Given the past and current inability of our Congresses and Presidents, both Democrats and Republicans, to act responsibly regarding fiscal budgets and debt policy for our nation, a “Balanced Budget Amendment” to the Constitution appears to be necessary. This amendment should mandate a federally balanced budget including a federal spending “Cap” of no more than 20% of GDP (preferably less), and with “Safety Valve” exceptions granted only for “War” or “National Emergency”. These exceptions should require a “Supermajority Vote” in Congress to authorize and the signature of the President to enact. Unfortunately, short-term personal political motivations appear to be stronger than the long-term fiscal responsibilities to our national economic needs. Therefore, we do need a “Balanced Budget Amendment” to protect the American People from continued irresponsible and dysfunctional fiscal and debt behavior by our federal legislators and Presidents. If we needed any additional indication of the necessity to curb government spending, the recent federal debt downgrade from AAA to AA+ by Standard & Poor’s should suffice.

Forty-nine States have some version of a balanced budget requirement (only Vermont does not). Interestingly, Germany and Switzerland, both strong financial nations, also have a balanced budget requirement. This forces their legislators to behave in a responsible manner that protects the national fiscal and long-term debt interests of the people they were elected to serve. Without such a constitutionally protected provision, including the “Cap” on federal spending above, lawmakers are prone to ignore the long-term fiscal consequences of the laws they pass and focus on their own short-term reelections. The relentless historical increase in our national debt and especially the current deficit and debt crises are clear evidence of irresponsible short-term decisions by our Federal Government.

Prior to the passage of 16th Amendment in 1913, which permits federal income taxes directly on the people, we had governments that were forced to limit their size and spending to a level reasonably consistent with federal revenues. The funds available required adherence to the provisions for limited federal government defined in our Constitution and required the establishment of appropriate priorities for federal programs and services. In other words, our government was reasonably forced to live within its means. What a revolutionary concept!! After the 16th Amendment, our government could (and did) simply increase income taxes or borrow to meet whatever programs or bureaucracy they deemed desirable, not necessarily important or essential. In 1913 federal spending was less than 3% of GDP. In 2008, President Bush’s last year, federal spending was approximately 20% of GDP and this year under Obama, the federal spending is estimated to be 25% of GDP. This is madness and does not serve the American people.

As mentioned above, since 1913 our elected officials have relied on increasing income taxes on the American people or debt to pay the increased costs of the programs and bureaucracy they desired, regardless of the cost, need, or even importance of these programs to the American people. It is easier for politicians to identify a socially “desirable” program than to identify and justify its costs and priority to the taxpaying public and its overall benefits to society. Our government has merely increased taxes to pay for these new or expanded social entitlement programs or added to our National Debt by borrowing the missing funds (increasingly from foreign sources, like China). In 2008 our National Debt was $10.0 trillion, a $4 trillion increase in eight years under President Bush. Currently, under President Obama in only two and one-half years, our National Debt has increased another $4 trillion (a 40% increase) to $14.3 trillion and, even after this week’s debt agreement, is projected to grow another $8 trillion to approximately $22 trillion over the next 10 years. This is more than 100% of projected GDP, is not sustainable, and must be corrected.

In economic theory (especially Keynesian), a balanced budget amendment would limit our government’s flexibility. It would restrict government fiscal actions to correct imbalances in our economy, such as running “deficits” to stimulate the economy during recessions and the use of “surpluses” to retard excessive and unsustainable growth. In theory, this should smooth economic growth by limiting the magnitude of peaks and valleys in the business cycle. This in turn would restrain “booms”, minimize “busts”, stabilize economic growth to reasonably sustainable levels, and avoid excessive fluctuations in job markets. Nearly all economists believe that prudent use of this power is good but excessive use is bad. All good stuff in theory! Unfortunately, the behavior of our governments and the actual results have not followed the theory. “Excessive use” has repeatedly hurt our economy and job growth starting with FDR in the “Great Depression” and currently with the Obama Administration’s “Stimulus”, expansion of government size, and spending to support his big government agenda. Also, when federal surpluses were possible, as with the Kennedy, Reagan, and Bush tax rate reductions (all of which increased economic growth and tax revenues), Congress quickly initiated new spending programs to use the money (Johnson’s “Great Society”, Bush’s wars, and the Democrat Congress’ Prescription Drug Program in Bush’s second term). As I have repeatedly said, socialism and long-term economic growth are not compatible. Most other nations, including many in Europe, and especially Russia, India, and China, have learned this and are increasingly relying on free market economies and prudent fiscal and monetary policies.

Since the founding of our nation, balanced budget legislation has been discussed. Thomas Jefferson was the first President to think seriously about requiring balanced budget legislation to maintain fiscal discipline and he actually wanted to ban federal borrowing power to limit the potential size of federal government. Ultimately, he concluded this would be too restrictive in times of emergencies, especially wars. For over 200 years our nation has relied on the wisdom and responsibility of our elected officials to act appropriately on behalf of the American people. The introduction of the federal income tax amendment above combined with the evolution of our short-term political reelection process has unfortunately undermined the ability of our legislators to perform their fiscal duties to serve the long-term interests of the American people. It is time to renew the effort to force our federal government to behave responsibly. Clearly, history, since 1913 has shown that they cannot be trusted to do it on their own.

So “Yes”, we do need a Constitutional “Balanced Budget Amendment” with federal spending “Caps” and a “Safety valve” for national emergencies to rein in the reckless fiscal behavior of our elected officials. Our governments are increasingly turning our nation into a centrally controlled socialist debtor nation. These policies are not the foundation of freedoms upon which our country was created and which made America great. It’s time to return our country to the individual liberties, free markets, sound fiscal and monetary policy, economic growth, and limited government upon which it was founded.

The Old Guy PhD


Are Public-Sector Unions Destroying Democratic Government?

March 11, 2011

G’Day!

The fiscal and debt crisis facing many of the 50 states and the bankruptcy of General Motors have highlighted the critical role public and private-sector unions have in our ability to compete globally and in the functioning and long term solvency of our state and federal governments. The demonstrations in Wisconsin and similar events in Indiana, Rhode Island, New Jersey, and Ohio, not to mention the budget crisis in New York and California, are emphasizing the magnitude of the controversy and crisis facing our governments over well-intended but overly generous and unsupportable public-sector union benefit packages. Unlike the private sector, public-sector workers are paid by taxpayers, currently receive benefits and wages that are above the average paid for similar work in the private sector, and have greater job security. Without significant change and fiscal sanity restored, many states will ultimately face one or a combination of undesirable choices: raising taxes on business and/or the general population, cutting services, reducing salaries and benefits of public-sector workers, or declaring bankruptcy and starting over.

Originating in Europe, unions transferred to the USA in the 19th and especially the 20th century.  They began in the private sector with legitimate goals of fair pay, better & safer working conditions, and fair bargaining for labor contracts. In the private sector unions work because in a competitive free-market there is an objective economic outcome, which, when successful, maintains profit for the owners and appropriate wages and working conditions for the employees. If owners are too greedy, good employees will leave and the firm will fail. If employees are too greedy, costs will be uncompetitive and the firm will fail. Under either situation both owners and employees will lose, so both parties have incentive to balance their demands so that the firm succeeds. It was the excessive bargaining power of the unions combined with increasing competition that led to many private U.S. firms’ bankruptcies (think General Motors and the Airlines) and that ultimately led to a decline in private-sector unions. Private-sector union membership peaked in 1953 at 25.5% of the labor force and has declined steadily afterwards. I support private-sector unions in a competitive, free-market economy as long as they are “open shop”, represent “right to work” conditions, have “secret balloting” for elections, and are not biased by legislation.

Public-sector unions did not exist until the late 1950s, when, Robert Wagner, Mayor of New York City, in an appeal for votes (an omen of things to come), signed an executive order authorizing the city workers to unionize. Other Democrat-led local and state governments followed his lead and President Kennedy, also by executive order, authorized federal workers to form unions in 1962. Prior to this, public-sector workers were expected to earn less than private-sector workers in return for job security and service to the public. Even union leaders recognized at that time that collective bargaining by government workers was biased in favor of workers, unfair, and inappropriate.

Public-sector unions do not represent the conditions necessary for fair and balanced negotiations with elected government representatives. Government jobs do not have a competitive market (governments and essential services don’t compete), don’t have an objective economic outcome that forces compromise (governments don’t go bankrupt, yet), and the taxpayer owners are represented by temporary agents who negotiate for wages and benefits with workers who vote them into office. The contracts from these negotiations endure permanently into the future long after the elected politicians negotiating for the taxpayers have departed. There is clear bias when short-term reelection partially depends on the votes of these employees. This process is further biased where public-sector unions are large and have full  “Collective Bargaining” rights, as is currently the case in 26 states.

Because wages and benefits to public-sector workers come from taxpayers, ALL taxpayers in total are funding these contracts AND union dues. A portion of these union dues is recycled into the election and lobbying process as political support for union favored candidates and laws (like the current “Employee Free Choice Act”, which is union biased and should be killed). In 2007-08 unions spent $165 million on elections and proposed legislation. Andy Stern of the SEIU bragged that the union spent $60 million to get Obama elected. Not surprisingly, the majority of these recycled union funds go to support the Democratic Party and no wonder that Democratic Senators in Wisconsin and Indiana have fled their states and elected responsibilities in support of union protests against proposed limits on union power and benefits.

Do the public-sector unions really have a legitimate complaint? Are they underpaid? Are their benefits unfair? Is their job security worse than the private sector? The obvious answer to all these questions is, “Hell No!” The US Bureau of Labor Statistics for 2009 indicates that unionized public-sector workers have a 31% advantage in wages and a 68% advantage in benefits over nonunionized workers (with a much larger advantage in defined-benefit pensions and health insurance) and their job security is almost assured, especially in education. Public-sector union members generally contribute little or nothing for their healthcare and pensions and in many cases can retire at a significantly earlier age than private sector workers. And remember, taxpayers are the source of their wages and benefits. I ask the questions, “Does the service and value provided by public-sector workers justify their higher-level of pay and benefits over the private sector?” If not, why are we, the taxpayers, paying it?

The chart above represents the trend in public vs. private-sector union workers since 1973. It illustrates that union membership in the private sector has declined by over 50% from approximately 15 million to 7.1 million to approximately 8% of the workforce. During this period public-sector membership has increased by over 150% from approximately 3 million to 7.6 million and represents more union members than the competitive private sector for the first time in history. This growth in government workers and spending must stop and proper priorities set on what we can fiscally afford as a nation. Our government cannot do every “desirable” project. Endless growth in State and Federal Governments promoted by unions is increasing regulations, increasing the size and cost of government, stifling economic growth and innovation, and restricting private sector job expansion. We, the people not the government, must accept primary responsibility for our families, our neighborhoods, our country, and ourselves.

So what should we do? First and most important, where it still exists, collective bargaining for the public sector, which should have never been permitted, should be ended, the proper balance between taxpayers and government workers restored, and its undemocratic and prejudiced influence in the electoral and negotiating process halted. Second, effective immediately, all new hires into public-sector employment should have a new retirement age consistent with those in the private sector, revised pension and healthcare contracts in which they must contribute appropriately to their health and pension plans, pension plans that are based on defined-contribution not defined-benefit, wages based on performance not longevity, and where it exists, “tenure” should be abolished. Third, existing retirement contracts for long-term government employees approaching retirement age (to be determined but within approximately 10 years of retirement) should be honored, but they should be required to begin contributing to their healthcare and pension plans as above. Fourth, employees with longer than approximately 10 years to retirement age should also begin contributing and have their retirement phased-in as appropriate to match the new retirement age.

These major recommendations are admittedly oversimplified for brevity and will differ by State and between State and Federal workers depending on existing contracts. However, they will significantly reduce the current and long-term fiscal crises facing our state and federal governments. Other non-union related issues and recommendations will be the subjects of a future post.

The near-monopoly stranglehold public-sector unions have over large portions of our state and federal governments must be broken or the unsustainable budget and debt problems will continue to erode and potentially destroy our democratic institutions of government. Public-sector workers must be compensated like private sector workers based on value-added.

It’s time to curb public-sector unions, return power to the taxpayers, and restore fiscal sanity to our government.

The Old Guy PhD