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


Obama Administration Attacks American Business Again!

April 29, 2011

G’Day!

In just the last few days, the Obama Administration has directly or indirectly initiated four (see below) separate anti-business actions against American corporations, which interfere with our national economic growth and prosperity. These actions are similar to strong-arm tactics initially used by authoritarian regimes to increase central government control and to decrease individual and economic freedoms. As I said in Tuesday’s OpEd, “Attack on American Business by Obama “packed” NLRB!”, this is a very, very dangerous precedent. The policies of President Obama do not represent the American free market, limited government culture I know and admire. Specifically, the actions taken in the last week are:

1) The National Labor Relations Board (NLRB) has agreed with a union complaint against Boeing and South Carolina to prevent Boeing from opening the nearly completed expansion plant in South Carolina for the 787 Dreamliner.

2) The Environmental Protection Agency (EPA) under Lisa Jackson has stopped a Department of the Interior’s previously approved Shell Oil request to drill and develop a 27 billion barrel oil reserve in the Arctic Ocean off Alaska.

3) The Health and Human Services Department (HHS) under Kathleen Sebelius has demanded the firing of the CEO of Forest Labs, a privately owned firm, under the coercive threat of refusing to do government business with the firm, if the CEO is not replaced.

4) The NLRB (again) is suing Arizona and South Dakota to invalidate a law requiring “secret ballots” for union recognition in those States. Two (2) other States have also passed similar laws. (How silly of me, I thought secret ballots were a fundamental part of our democratic freedoms.)

All of these actions represent intimidation or possibly even extortion by these government departments, agencies, and boards to bully privately owned businesses and even States of the Union to conform to the wishes of the current Administration. This is an unprecedented use of governmental administrative power in peacetime and is not in keeping with the freedoms we have enjoyed in this country for over two hundred (200) years. If this were happening in another country, we might call it “creeping fascism”. I sincerely hope this is not Obama’s intent.

Equally disturbing is the trend by the Obama Administration to bypass Congress and increasingly use administrative force, not legislation, to control and implement the Administration’s agenda and greater centralization of Presidential power. Evident in the actions above is promoting unions over business, environment over energy development, and intimidation of private businesses into conforming to healthcare and other administrative objectives. This centralization and probable misuse of administrative power is not good for our democracy or our nation.

The EPA’s frivolous and damaging action against Shell Oil is worthy of additional comment because of the importance of energy in our economy. This is another questionable environmental complaint by the EPA that forces Shell to abort its approved exploration and development of domestic oil resources in the Arctic Ocean off Alaska. The court ruling on the EPA claim is that the air quality of the remote village of Kaktovik, with less than 250 people and 70 miles away from the drilling site, will be “close to” the air quality standard (not above) based on the greenhouse gas emissions from an icebreaker servicing the site. Also claimed is the site is “too close” to ANWR (but not inside it) and wildlife will be endangered.

This action by the EPA comes at a time when higher domestic oil production is critical to reducing our dependence on vitally necessary oil from questionable foreign sources. The US currently consumes 18.8 million barrels of petroleum per day (approximately 6.8 billion/year) of which approximately 50% is imported. The proven US oil reserves are only 19.1 billion barrels. The Shell project in the Arctic Ocean was expected to add 27 billion barrels and 74 trillion cubic feet of natural gas of new US reserves, which would more than double the current level of US petroleum reserves! Shell has already invested almost $4 billion and over 5 years in the project, $2.2 billion for the leases alone.

This is another deliberate anti-business action by the Obama Administration, this time the EPA, and further stifles economic development, domestic oil production, American job creation, and encourages American businesses to move offshore. We do not need an authoritarian government that dictates to its people and its businesses what they can do, where they can do it, and how they can do it. If this policy is continued, it will restrict economic growth, innovation, job creation, and our personal liberties; AND it will further pressure our American enterprises to move to more business-friendly nations. I believe it was Thomas Jefferson who said, “That government is best which governs least.” This is good advice and should be remembered at the next election.

It’s time to take back our country and return to Constitutionally protected freedoms, free markets, economic growth, and limited government. Let’s get to work!

The Old Guy PhD