The House of Representatives voted today on H.J. Res 2, a Balanced Budget Amendment (BBA). Because it would have amended the Constitution, the BBA would have needed a two-thirds majority vote to pass. The final vote count was 261-165, with four Republicans voting against the bill (though some cast their votes because it wasn’t strict enough) and 25 Democrats voting for the bill.
This vote came about directly as a result of the August debt limit agreement, in which conservatives demanded a vote on a balanced budget amendment before the end of the year. Besides requiring the president to submit a balanced budget to Congress each year, this amendment would have required a three-fifths majority vote in order to raise the nation’s debt limit (which, in layman’s terms, would mean more playing chicken with the U.S. credit rating). A number of House Republicans would have preferred to vote on an amendment that included both a spending cap at 18 percent and a two-thirds majority vote requirement in order to raise revenue; this amendment did not include those measures seemingly in an effort to gain more Democratic support.
The term “balanced” budget amendment is misleading – it fools people into thinking it may be a responsible policy to support. This is anything but the case – a BBA would in fact be a gravely irresponsible way to go about addressing our nation’s fiscal issues. Bob Greenstein of the Center on Budget and Policy Priorities sums it up nicely:
“The amendment would raise serious risks of tipping weak economies into recession and making recessions longer and deeper, causing very large job losses. That’s because the amendment would force policymakers to cut spending, raise taxes, or both just when the economy is weak or already in recession — the exact opposite of what good economic policy would advise.”
When recessions hit, spending on unemployment insurance and various other safety net programs, like food stamps, increases as more people fall on hard times (these are called automatic stabilizers). At the same time, revenues fall due to fewer people working and paying taxes. This leads to natural deficits during recessionary times. These deficits then shrink as spending on automatic stabilizers eventually falls and revenue streams eventually pick up. A BBA would not allow this excess spending, and would instead force spending to fall along with revenues. This would be disastrous during economic downturns both macroeconomically and for millions of Americans’ living standards. The Macroeconomic Advisers, an economic forecasting firm, recently provided interesting detail in a blog post regarding what might have happened had a BBA been passed and ratified, and taken effect in 2012. They say:
“The effect on the economy would be catastrophic. Our current forecast shows a Unified Budget deficit of about $1 trillion for FY 2012. Suppose this fall the federal government enacted a budget for FY 2012 showing discretionary spending $1 trillion below our forecast, resulting in a “static” projection of a balanced budget for next year. $1 trillion is roughly two-thirds of all discretionary spending, and about 7% of GDP. Our short-run multiplier for discretionary spending is about 2, and let’s assume a simple textbook version of Okun’s law in which the unemployment gap varies inversely with, but by half as much as, the percentage output gap. Then, instead of forecasting real GDP growth of 2% or so for FY 2012, we’d mark that projection down to perhaps -12% and raise our forecast of the unemployment rate from 9% to 16%, or roughly 11 million fewer jobs. With interest rates already close to zero, the Fed would be near powerless to offset this huge fiscal drag.”
In sum, if a BBA had been in place, it would have resulted in catastrophically lower GDP growth for FY 2012 and catastrophically higher unemployment. A BBA is a bad idea that does not deserve the falsely positive term “balance” in its title.