Fiscal Responsibility and the U.S. Constitution

December 8, 2005

What’s the role of the U.S. Constitution in guiding sound fiscal policy? That’s one of the questions tackled by Nobel Laureate economist James Buchanan—the godfather of public choice economics—in a new essay on constitutional amendments he’d like to see implemented. Here’s a provocative excerpt:

Political leaders, both legislative and executive, with public support, act as if it is possible to spend without taxing, indeed as if the fisc offers the political equivalent of perpetual motion. This observed fiscal profligacy stems from diverse sources: institutional history, Keynesian follies, supply-side exaggerations, and, finally, the very logic of collective action, which fosters the personalized illusion of something for nothing, especially amid the natural constituency pressures of representative democracy.

The twentieth century experienced a manifold increase in the size of government, at all levels, but concentrated in the United States at the federal level. The political decision structure accelerated this growth. Congress found itself able to advance popular spending programs separately from the imposition of taxes needed to finance them. Further, the spending process itself was effectively decentralized through the delegation of authority to committees, members of which were necessarily responsive to interest groups. Sporadic efforts to reform the budgetary decision structure have been unsuccessful.

Ideas have consequences. The heritage of budget deficits can be traced, in part, to the now-discredited Keynesian economics, which dominated the academies in mid-century and influenced political arguments from the 1960s. The Keynesian response to the Great Depression neglected monetary relevance, causal and corrective, and emphasized budgetary expansion through debt finance, soft-pedaled by a bizarre denial that the incidence of spending even exists. Politicians were delighted with this logic and rushed in to expand government outlay.

As concerns over mounting deficits emerged in the late 1970s and early 1980s, opportunities were missed to introduce a constitutional amendment for budget balance. In part, this failure was due to the Reagan administration’s distraction by supply-side arguments, which relegated deficit worries to the second order of smalls. The Reagan cuts in marginal tax rates did, indeed, set the stage for economic growth, which during the 1990s obscured the fiscal profligacy inherent in existing institutions and attitudes.

Fiscal responsibility again moved to center stage in public discussion in the early 2000s, as responses to terrorism and natural disasters supplemented ordinary proclivities to expand governmental outlays. The urgency of reform is exacerbated by the recognition that creditor accounts have increasingly been accumulated by Asian central banks.

A constitutional amendment could take the following form. In its final budget resolution, Congress should restrict estimated spending to the limits imposed by estimated tax revenues. This requirement should be waived only upon approval separately by three-fourths of the House of Representatives and the Senate. This exception would allow for debt financing of federal outlay in situations that are indeed extraordinary (major wars, natural disasters), an exception recognized by classical public finance.

Such a constitutional amendment would exert a major impact on world attitudes. Such action would, in itself, increase prospects that the dollar would not lose its role as the international reserve currency. The attainment of fiscal responsibility by the United States, both in fact and appearance, is imperative. Specific amendment of the Constitution offers the means for telling the world that the fiscal house is in order.

Read the full piece here. Read the first of three responses here.


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