National Balanced Budget Amendment

One of the more popular ideas circulating to reduce federal government spending is for a balanced budget amendment to be added to the U.S. Constitution. Almost every U.S. state constitution currently has some version of a balanced budget amendment in place. Republican presidential candidate Rick Perry has said that it is one change to the Constitution that he would strongly support. Newt Gingrich and several other presidential candidates agree with Perry, a balanced budget must be a short-term goal for the United States. It's also a popular idea with voters; one poll shows that about 66% of Americans want a balanced budget for the federal government.


Governor Perry's preferred method to deal with federal overspending.

But what is popular is not necessarily a good idea. Let's look at the history of the U.S. budget and show how a balanced budget amendment would work and see if it seems like a great idea for the federal government.

A look at Federal Debt
One important fact to keep in mind when considering a balanced federal budget is that the United States government has always been in debt. Budget surpluses have occasionally allowed for a large portion of that debt to be paid back, but it has never been paid off. Even when it has been mostly paid off, a war usually ensued that rapidly escalated the debt back to a high level. For a recent picture of the debt, here's an image showing it since 1940, with a sharp increase right at the start due to WWII.



Since the United States is still involved with two wars and also invests a significant amount of money into combating worldwide terrorism, it doesn't seem out of place for there to be significant government debt right now. Perhaps once President Obama's withdrawal plan for Afghanistan is completed it will be possible for the debt to be reduced significantly. Wars are expensive, so it shouldn't be a surprise to anyone that the debt has kept increasing.


Military supplies brought to you courtesy of the national debt.

The addition of revenue loss due to the large tax cuts passed during the last decade basically guaranteed that the national debt was going to be quite large. With the description of the current situation out of the way, let's look at the inner workings of a balanced budget plan for the government.

How a Balanced Budget Amendment Works
Fortunately, it's easy to see how a balanced budget amendment works since most states have one in place. They force the state's legislature to make up for any budget shortfalls each year by reducing spending or increasing taxes to ensure that the state does not fall into debt. There isn't much tolerance for increases in taxes lately in the U.S. so states have had to rely on spending cuts in order to meet their balanced budgets. This has resulted in layoffs of state employees and deep cuts in spending due to falling tax revenues stemming from economic turmoil from the recession. Although this has been painful for vulnerable segments of society that are reliant on state programs for support, state spending cuts typically are not that noticeable for citizens who can support themselves financially. Unfortunately, that would probably not be the case for federal spending cuts.

State vs. Federal Balanced Budget Amendments
The biggest reason that state spending cuts are not all that noticeable for most of the population is that a lot of the most important spending, such as Defense, Medicare, and Social Security, takes place at a federal level. The federal government also gives a lot of money to states to fund education and other state programs. So, even if Maryland decided to not spend any money for a year, they would not be vulnerable to foreign invasion since they're still protected by the national military and some services, particularly those directed toward the elderly, would still be provided courtesy of federal spending. Additionally, while it would be painful for residents of Maryland, the rest of the country would likely not even notice.

In comparison, if the federal government needed to cut back on spending suddenly, the entire country would feel the impact. The federal government spends trillions of dollars each year, including billions of dollars that go to each state in the union. The problem with a balanced budget amendment is that the federal government responds to major challenges for the country.


Such as this, for example.

So, if something like Pearl Harbor were to occur today, the states are not responsible for the response to it. It's the federal government that has to rebuild the Pacific fleet and create a military capable of fighting in Asia and Europe. This is why it's acceptable for states to have balanced budget amendments, they are not the level of government that responds to large-scale disasters. Even with major floods and hurricanes, it's the federal government that provides the bulk of the money for rebuilding efforts.

One important point to bring up is that proponents of balanced budget amendments do typically allow for an exception to be made in times of war and national emergency. Congress would be able to vote for a time of national emergency to be declared so that the need for a balanced budget could be ignored for a few years while the war or whatever is resolved. However, the current political environment in Washington shows that it may not be possible for Congress to agree on whether the country is in a major emergency or not. Earlier this year, Republicans and Democrats could not even come to agreement on raising the federal debt limit, even with months of warning, resulting in the United State's credit rating being reduced for the first time. Compromise just seems to be impossible in the government right now, so I wouldn't count on the political parties putting aside their differences to allow a little matter like a major war to determine that the balanced budget needs to be ignored for a year or two.


Particularly when some members of government point to federal spending as being a worse enemy than the Nazis.

The Potential Consequences of a Balanced Budget Amendment
So, let's say the worst case scenario of a major war or other unanticipated and extremely expensive disaster occurs and Congress doesn't agree to lift the balanced budget requirement to deal with the problem. Let's use the example of the wars in Iraq/Afghanistan as a new budget issue. They have cost around $3.7 trillion so far. That number is as large as the entire yearly U.S. budget! Now, that cost has to be spread over 10 years of budgets, but that's still a hell of a large unanticipated expense. Well, here's the budget:


What do you want to cut out?

Basically, no matter what part of the budget you want to cut, it will be a hell of a painful cost for the country. Perhaps that's part of the point of a balanced budget amendment, it makes for some really hard decisions that maybe the United States should have to make. But still, do you really want those decisions to have to be made while we're in the middle of a national disaster? In this instance, I think Rick Perry and other supporters are a little off the mark in what needs to be done to fix the U.S. budget. Yes, it needs to be reduced, but it should not be forced in this manner.


Without a serious discussion on the budget, we may end up not aiming at the right parts to cut.

Trickle Down Economics Doesn't Work

The Theory
One of the most heralded theories behind Republican economic policies of the last few decades has been trickle down economics. Basically, the theory holds that wealthy individuals pass down a significant portion of their income to lower income brackets. Thus, what is good for the wealthy will also be good for everyone else. After all, someone has to mow their lawns and prepare their meals right?

The theory is also applied to large corporations and companies. Policies beneficial for them should also be good for smaller businesses and consumers.

In Practice



Unfortunately, in practice there isn't much of a trickle down to the lesser classes. With the exception of some celebrities and dictators, most of the wealthy tend to place their wealth in places like this:



This is great for their personal net worth, but unfortunately wealth has to be spent in order for it to trickle down to the middle and lower class. The wealthy also have access to all sorts of ways to keep their money in places where it cannot be taxed at all or is not taxed at a very high rate. This results in the middle and lower classes bearing a larger share of the tax burden needed to finance the government than the upper class, (yes, the wealthy still pay more total dollars in all likelihood, but as a PERCENTAGE of their total wealth they do not). Corporations are also fond of moving their corporate headquarters around the world to dodge taxes as well.

So how has the last couple decades of removing regulations and lowering taxes for the wealthy played out in terms of the finances of the common folk? Since the wealthy are, by any standard, doing better than ever, if the trickle down theory holds true regular people should also see their situation in life improving.


A Rolex for everyone right!?

It isn't trickling down
Here's an image of the actual income distribution in the United States.



The top 20% of incomes hold about 80% of the wealth in the country. The bottom 60% of Americans hold around 5% of the total wealth. If trickle down economics really worked that would not be the distribution.

Another unsurprising but depressing statistic came out recently, the average worker's share of national income produced by businesses has dropped to a record low. This trend began in the recession following 9/11 and has continued to this day.




This is despite the fact that corporate profits have been rising significantly over the last year or so, with massive gains reported in late 2010. However, rather than using that money to create jobs, raise pay, or promote workers, companies have chosen to use it to expand their infrastructure by purchasing new equipment and software. Although this may improve productivity it doesn't create many jobs. Even worse, many are simply holding on to their profits as a cash reserve.

Why has the worker's share of revenue decreased so much?

Partially it would seem to be the end result of the shift of millions of well-paying manufacturing and technology jobs overseas. With the benefit of strong, tough unions, laborers used to make good wages and solid benefits building automobiles and other items, but shifting jobs overseas allowed companies to hire cheaper workers and not have to pay union salaries. This helps companies profit handily but the workers who held such jobs are stuck with poor career choices. In many cases, they have to train for an entire new career. I know several nurses who used to work in the automobile industry but they saw the changes that were coming and realized they would have to find a new career if they wanted to keep a job.

Another possible explanation is that unions have declined in power lately. In many cases, they have been successfully cast by conservatives as being a villain fighting hard against corporations valiantly trying to create jobs.


After all, the Communists had a union too!

One of the most successful smear jobs was against the U.S. automobile industry, where union wages and benefits were blamed for why U.S. automakers were uncompetitive. Some popular myths included the "fact" that auto workers were making $70 a hour. It actually was blatant misinformation that included all benefits in the hourly wage, but that was conveniently ignored. Besides producing inferior vehicles for a period of time, the main reason that U.S. automakers are in trouble is that they have a lot of retired workers to support whereas foreign automakers haven't been around as long in the United States so they do not have hundreds of thousands of retiree's worth of pensions and healthcare to cover.

Yes, unions create vexation for many companies, but they are one of the few ways workers have to negotiate with large multinational corporations. If anyone thinks Domino's Pizza will talk to one of their delivery drivers who has a problem with how they do things, they're talking out of their ass. However, they will have to listen if all of their delivery drivers together have a problem with the way they're doing business. If you are in a business without a union, asking for a raise with all of the current economic fear is a good way to lose your job. This is especially true when all sorts of companies and even the government are hemorrhaging positions, forcing early retirements, cutting pay, and slashing benefits.

How could this problem get any worse?

Expenses are Rising
Well, unfortunately the price of most basic commodities like fuel and food have also been rising lately.


The data is still coming in for how Rolls Royce prices have been affected.

As pay isn't improving in line with price increases, the spending power of most Americans is reduced. Given that the average salary of the bottom 90% of Americans is around $30,000, that poses a bit of a problem.



Well, the solution to that should be easy right? Get a better education and you can get a higher paying job! That would be a great solution except that the price of college has also been rising dramatically. I was fortunate in that my parents made wise investments for my college education so that I graduated debt free, but I know many friends who are $40,000 or more in debt and will have to try and pay that off with dubious job prospects on the horizon. But, hey, maybe the answer is to take out some more loans and go to grad school!


Possible back injury risk not included in tuition and fees.

Will it get better?
There is certainly a problem with the distribution of wealth in the United States. It used to be that one decent salary was able to support an entire family back in the 1950's. I'm not going to pretend that it was a golden age for the United States, as there was a great deal of wage and job discrimination toward women and minorities, but the actual distribution of wealth was much more equitable.

Jobs should offer a decent living wage. It isn't right when families with two wage earners, who are possibly working more than one job each, are worse off than families who had just one position fifty years ago. Unfortunately, many of the jobs that are being created at this point tend to be in the service industry category-jobs with low pay, poor to no benefits, and minimal room for advancement. These aren't the types of positions that are going to solve this problem.

It's somewhat understandable that companies are reluctant to make new, well paying jobs right now. The economy's recovery is still uncertain. However, it's also a fact that until unemployment goes down Americans will not feel confident in the economy. Maybe if companies tried hiring some employees it would help move us in the direction of a recovery.