Why the Balanced Budget Amendment Failed to Fix U.S. Federal Spending

The US national debt has hit a staggering $35.2 trillion as of September 2024. This number shows the serious money problems the country faces right now. A balanced budget amendment seems like a solution to control federal spending. However, careful analysis reveals it could wreck the economy.

The numbers tell a frightening story. Such an amendment in fiscal year 2012 would have pushed unemployment from 9% to 18%. This means about 15 million Americans would have lost their jobs. People argue this amendment would protect future generations from debt. The reality looks different since the last federal budget surplus happened back in 2001. This shows how hard it is to balance responsible spending with a stable economy.

This piece looks at why the balanced budget amendment never took off. It had economic problems, faced political roadblocks and could hurt important federal programs. The amendment would also tie the government’s hands during economic emergencies. We saw this clearly when deficits hit record highs of $3.1 trillion in 2020 as the government fought the COVID-19 pandemic.

 

How a Balanced Budget Constitutional Amendment Would Work

A balanced budget amendment (BBA) would create a constitutional rule that makes it illegal for federal spending to go beyond federal receipts. The government would not be allowed to run annual budget deficits. Most proposals go beyond simple balanced budget rules and include several provisions that limit federal fiscal policy. These amendments want to create binding legal frameworks that push Congress to make tough fiscal choices instead of continuing to spend more than it takes in.

Key provisions in proposed amendments

Most balanced budget amendment proposals contain these core provisions:

• Total federal outlays must not exceed total receipts for any fiscal year
• The President must submit a balanced budget to Congress
• Total spending caps as a percentage of GDP (usually around 18%)
• Rules that restrict raising the federal debt ceiling
• Limits on total federal revenue collection
• Rules that stop courts from enforcing the amendment through tax increases

Many proposals also allow exceptions during special circumstances. These exceptions cover times of war, national emergencies, or economic downturns. The government must declare these situations through official channels.

Enforcement mechanisms and challenges

No one agrees on how to implement a balanced budget amendment, which creates big problems. The Supreme Court or the President would need to step in and force compliance when Congress fails to balance the budget.

The courts face tough questions about who can sue when deficits happen. They might need to make unprecedented choices about solutions – possibly ordering specific tax increases, program cuts, or declaring certain spending illegal. The Justice Department believes this lack of clear enforcement could give courts too much power over basic taxing and spending decisions.

Presidential enforcement could reshape constitutional powers in dramatic ways. Presidents might claim they can withhold funds or stop issuing checks when deficits loom. This creates serious worries about power balance and who answers to voters for fiscal decisions.

Supermajority requirements for deficit spending

Supermajority rules play a vital role in most balanced budget amendment proposals. These rules need three-fifths or two-thirds approval from both parts of Congress to allow deficit spending or raise the debt ceiling.

Take Senator Mike Lee’s 2023 proposal as an example. His amendment would need supermajority votes in both the House and Senate before any tax increase or debt ceiling change. The Budget Control Act of 2011 solved that year’s debt-ceiling crisis and required Congress to vote on a balanced-budget amendment. The act said the debt ceiling would automatically go up by $1.5 trillion once states received such an amendment.

Critics point out that getting three-fifths votes for major bills rarely happens, even during economic crises. Economic data often comes in months late, which might delay spotting downturns until serious damage occurs. This could block quick changes to balanced budget rules during recessions when deficit spending might help most.

These complex enforcement issues have stopped balanced budget amendments from becoming part of the Constitution. Questions about court interpretation, executive power, and real-world implementation remain major roadblocks to adoption.

Economic Flaws in the Balanced Budget Amendment Concept

Economic theory and real-world evidence show several basic problems with the balanced budget amendment (BBA) concept. Over the years, economists have warned against making budget balance a constitutional requirement whatever the economic conditions might be.

How balanced budget requirements worsen recessions

The biggest problem with balanced budget amendments comes from their procyclical nature. The economy faces a natural decline in tax revenues during downturns while social program costs go up, which leads to rising deficits.

A BBA would force leaders to slash spending or hike taxes right when the economy is at its weakest—this goes against basic economic principles. This creates a dangerous spiral downward: a weaker economy forces the government to make deeper cuts or bigger tax increases. These actions further weaken economic activity and call for even harsher measures.

We can see this clearly in historical records. The federal government managed to keep balanced budgets before 1929 except during major wars, but the economic results weren’t anywhere near as good as modern fiscal approaches. Looking at the numbers from 1929 backwards, we saw 2.8 recessions per decade with growth periods lasting just 25 months. This changed after allowing deficits during downturns, with only 1.6 recessions per decade and growth lasting 64 months.

BBAs with recession exceptions don’t work well either. One proposal would pause balanced budget rules only after two straight quarters of economic decline or two months of unemployment above 7 percent. These triggers would have kicked in way too late during the Great Recession—13 months after it started and after 4.6 million jobs had vanished.

The problem with eliminating automatic stabilizers

Automatic stabilizers are a vital economic advancement from the last 80 years. These tools—mainly falling tax revenues and rising spending for unemployment insurance, Medicaid, and food assistance during downturns—help cushion economic shocks without Congress having to act.

All the same, a BBA would effectively shut down these stabilizers and replace them with automatic destabilizers. The current system lets these programs naturally moderate drops in total demand when private sector activity shrinks.

So without these stabilizers, economic downturns would hit harder since the amendment would demand tax hikes or spending cuts exactly when households and businesses cut back on spending. Former Congressional Budget Office Director Robert Reischauer pointed out this risk in his 1992 testimony. He explained that automatic stabilizers “temporarily lower revenues and increase spending on unemployment insurance and welfare programs” and help “dampen the amplitude of our economic cycles”.

That’s why economists strongly oppose removing these significant economic safeguards. Back in 1997, more than 1,000 economists, including 11 Nobel laureates, signed a statement warning that a BBA “mandates perverse actions in the face of recessions”.

Case study: What would have happened in 2008-2009

Understanding what a BBA could do becomes clearest through real examples. The federal deficit hit 9.8% of GDP during the 2008-2009 financial crisis. Automatic stabilizers alone accounted for 2% of this, even before counting any stimulus spending.

Putting a BBA in place during this time would have meant more than just skipping stimulus spending. The government would have needed to cut spending and raise taxes by nearly 2% of GDP just to offset automatic stabilizers. Economists estimate that after factoring in economic ripple effects, the required fiscal cuts would have been close to 15% of the federal budget.

The economic forecasting firm Macroeconomic Advisers ran the numbers for fiscal year 2012. They found that if we’d tried to balance the budget through spending cuts alone, we would have needed to slash about $1.5 trillion in just one year.

These cuts would have thrown about 15 million more people out of work. The unemployment rate would have jumped from 9% to 18%, and instead of growing by an expected 2%, the economy would have shrunk by about 17%. The Economic Policy Institute’s calculations showed similar results—a BBA during the Great Recession would have pushed unemployment from its 10% peak to around 21%.

Political Obstacles That Prevented Amendment Passage

The balanced budget amendment has hit roadblocks since the 1980s. Political obstacles, constitutional challenges, and wavering public support have stopped every attempt to add fiscal limits to the Constitution.

Partisan divides on fiscal policy

Recent decades show a gap between words and actions that has weakened balanced budget amendment efforts. House Republican leaders scheduled votes on balanced budget amendments right after passing tax cuts. These cuts raised deficits by up to $2 trillion over ten years. This disconnect fueled the Democrats’ opposition to balanced budget proposals.

The parties’ approach to fiscal policy shows their different core beliefs:

• Democrats favor bigger government with more services (75% support)
• Republicans want smaller government and fewer services (78% support)
• Democrats believe the government should tackle more problems (77%)
• Republicans say government handles too many tasks that businesses should manage (75%)

These opposite views block the cooperation needed to change the Constitution.

Constitutional amendment threshold challenges

America’s founders created tough barriers to change the Constitution by design. The amendment process demands:

Both houses of Congress must pass proposals with two-thirds majorities. After that, three-fourths of state legislatures need to ratify the amendment. These high bars have blocked every balanced budget amendment attempt.

States can take another path by calling for a constitutional convention. This needs support from two-thirds (34) of states. Some counts say 24 states have “live” applications. Nobody knows how this would work since an Article V convention has never happened in American history.

Shifting public opinion on government debt

Americans’ views on government debt paint a complex picture. Recent polls show 57% of Americans call deficit reduction a top priority—up 12 points from 2022. The party gap remains wide. Republicans (71%) prioritize deficit cuts more than Democrats (44%).

People’s views change drastically when they learn about consequences. Support for spending limits tied to debt ceiling increases drops from 64% to 30% when voters hear about default risks [35,36]. The number rises again to 57% when experts explain default’s “catastrophic” effects.

This mix of uncertain public views and deep party divisions keeps blocking the supermajority support needed to change the Constitution.

Why States Can Balance Budgets While the Federal Government Cannot

States must balance their budgets, but the federal government doesn’t face this requirement. The comparison between state and federal budgeting isn’t fair because they have different capabilities, responsibilities, and financial tools.

Different borrowing capabilities and responsibilities

States balance their operating budgets and borrow money for capital projects. This vital difference lets states fund infrastructure like roads, schools, and water treatment facilities through bonds while keeping their budgets balanced. States can spread these costs over time so future taxpayers help pay for infrastructure they will use.

States can’t use borrowed money for operating expenses. The federal government has unique national duties that states don’t handle, like military readiness, immigration control, and Social Security for all Americans.

How states circumvent their own balanced budget requirements

States use several methods to stay flexible despite their strict budget laws:

• All but one of these states can carry deficits into next year
• Most states keep “rainy day” funds ready for budget shortfalls
• States use accounting methods and delayed payments to meet requirements
• Some states don’t count certain funds in their budget calculations

A Columbia University study showed that from 1990-1993, ten states either moved deficits forward or borrowed to fix budget gaps. State and local governments now have about $4 trillion in outstanding bonds.

Federal monetary policy powers that states lack

The biggest difference lies in monetary policy control. The Federal Reserve, established in 1913, has powerful tools that states can’t use. The Federal Reserve controls interest rates, provides money during economic crises, and helps stabilize the economy.

The federal government prints its own money, while states depend on revenue or borrowing. This power lets the federal government keep spending during economic downturns when balanced budgets would force states to cut spending or raise taxes.

States know this limitation and rely on federal help, getting 38% of their total spending from federal funding. Yes, it is clear why having both governments follow balanced budget rules would make economic downturns worse instead of better.

The Impact on Critical Federal Programs and Trust Funds

A balanced budget amendment would disrupt critical federal programs that millions of Americans rely on every day. This goes beyond economic theory and political challenges. The need to balance spending with revenues each fiscal year would create immediate problems for programs that use long-term funding mechanisms.

Social Security and Medicare trust fund complications

Social Security has accumulated about $2.9 trillion in Treasury securities to pay benefits when baby boomers retire. A balanced budget amendment would make it against the constitution for Social Security to use these saved funds. The program could not access its own trust fund without breaking the constitution if the federal government had an overall deficit.

Medicare faces similar issues with its Hospital Insurance trust fund, which holds about $200 billion in reserves. Both programs might need to cut benefits right away—even with plenty of money saved—just because the government ran a deficit that year.

Federal deposit insurance and financial stability risks

The Federal Deposit Insurance Corporation (FDIC) has over $90 billion in reserves to protect bank depositors during financial crises. A balanced budget amendment would stop the FDIC from protecting bank deposits during failures. This limitation could lead to devastating bank runs like those before 1933.

More concerning, the FDIC would lose its power to protect uninsured deposits through “systemic risk exceptions”—which happened at Silicon Valley Bank and Signature Bank in 2023. This would remove a vital stability tool from America’s financial system.

Military and emergency response funding constraints

The Department of Defense and emergency management agencies would struggle under balanced budget rules. FEMA’s Disaster Relief Fund would lose the flexibility it needs to respond to hurricanes, wildfires, and other catastrophes.

The Department of Defense’s $849.8 billion budget would face cuts whatever global threats exist. Emergency exceptions might be possible, but they need supermajority votes—which are hard to get during crises when quick action matters most.

Conclusion

Data shows a balanced budget amendment would create more problems than it fixes. Economic downturns could see unemployment rates double. The amendment would tear down vital automatic stabilizers that protect American families.

States and federal governments have different fiscal duties that make direct comparisons miss the mark. States can balance operating budgets and borrow for capital projects. The federal government must keep military readiness, handle immigration, and protect retirement security nationwide.

BBA passage faces tough political and constitutional roadblocks that need unprecedented bipartisan teamwork. While 57% of Americans think deficit reduction matters, support drops by a lot when they face potential risks like government default or program cuts.

A BBA would create major operational challenges for key federal programs. Social Security’s $2.9 trillion trust fund and Medicare’s $200 billion reserves would become useless in deficit years. The FDIC’s $90 billion deposit insurance system would lose its power to stop bank runs.

The 2008-2009 financial crisis taught us why constitutional budget limits are dangerous. A balanced budget amendment would strip away the tools needed to handle economic emergencies. America’s fiscal stability would suffer as a result.

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