February 02, 2011 02:58 AM UTC

Balanced budget amendment

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• by: Wrong Way Corrigan

The balanced budget amendment is rearing its head again, this time sponsored by Democrat turned Republican Richard Shelby and Colorado Senator Mark Udall. (http://www.denverpost.com/breakingnews/ci_17261951)   The amendment is tricky legally, economically and politically.  

Economically, there really isn’t anything wrong with running a deficit.  In fact, small deficits can be beneficial to the economy, as the government makes long term investments.  The problem really comes in when the either the deficit becomes too large, or the debt to GDP ratio gets out of whack, and borrowing costs increase.  Unfortunately, there is no real way to know when this threshold is hit.  Japan has a dept to GDP ratio of well over 200%, Greece ran into a default situation when their economy hit 85%.  (Part of Greece’s problem was dishonesty about the problem, the other part was the markets do not perceive Greece as having good long term economic growth prospects.)  But the point is still, from a pure economics standpoint, there is no reason to balance the budget every year.  

Legally, there is a separation of powers issue.  Gramm-Rudman failed because the automatic cuts the bill proposed were viewed by the court as an executive branch function resting within the legislature.  (There had to be a government agency to implement the cuts, which meant the executive branch was determining the budget, a no-no under our constitution.)  Therefore, the only workaround is to amend the constitution, since a a statue was struck down by the courts.

But, what if, we had less stringent penalties for running the government finances amok?  Here is my proposal, which does not require amending the constitution.  

Pick some reasonable targets, like the deficit cannot be greater than 3% of GDP, AND the debt the GDP ratio cannot grow to greater than 60%.  That should easily keep the American economy flowing freely without too much leverage.  

But then what happens when one of those conditions is violated?  Since the court has rules automatic budgets cuts are unconstitutional, how does this sound:  All 535 members of congress would receive $0 salary for the following year.  Sure, it is only symbolic, but I think it would make a heck of a news story.  And as Scott Gessler has shown us over the past few weeks, most politicians are not rich and actually need their salary, so there is more than just public embarrassment at stake.  

This plan can be passed via statute, would sell well politically, and may actually cause some sway a few Congressmen on issues of fiscal prudence.