Fiscal rules in Argentina and Germany offer lessons for the U.S.

Posted on Tuesday, December 19, 2023
by Outside Contributor
argentina money; fiscal rules

After two decades of failed fiscal and monetary policies in the U.S., it is time to chart a new course. The Federal Fiscal Sustainability Foundation supports rules-based fiscal and monetary policies to replace discretionary policies.

Critics often argue that rules-based fiscal and monetary policies are not enforceable. That is certainly true of the statutory fiscal rules that Congress has enacted over the years, rules that are routinely circumvented or suspended. But it is not true when fiscal rules are incorporated in the Constitution.

The experience of two countries in the news recently provides insight into rules based fiscal and monetary policies.

Argentina enacted fiscal and monetary rules in the 1990s that restored economic stability. But over the past two decades, the Peronist government abandoned those rules and lurched from one financial crisis to the next.

With a debt to gross domestic product ratio of 85%, Argentina is on the brink of bankruptcy. So it is not surprising that the new president, Javier Milei, was elected on a promise to restore fiscal and monetary rules in the Argentine Constitution.

Over the past two decades, Germany has been the engine of economic growth in Europe. Germany has pursued rules-based fiscal and monetary policies that are enshrined in its constitution. The rules mandate that budget deficits cannot exceed 0.35% of GDP.

German courts recently ruled that proposed spending for a green transition project financed by debt violates the country’s constitutional fiscal rules. As a result, the government has frozen spending for the remainder of the year. The government is also reviewing all debt-financed federal spending in recent years to determine whether this complied with constitutional fiscal rules.

The U.S. is not Argentina, but we are rapidly approaching a failed state.

Federal deficits as a share of GDP are projected to exceed 2% in coming decades. Our ratio of debt to GDP now exceeds 100% and is projected to increase to more than 200% by midcentury. Foreign central banks and private citizens are less willing to purchase U.S. debt.

Decreased demand for U.S. debt has resulted in interest rates well above long-term averages. U.S. debt was recently downgraded by the bond rating agencies. This growth in U.S government debt is unsustainable.

Foreigners are also less willing to use the dollar in international transactions. The dollar is being replaced by other currencies in international trade and finance.

The choice for U.S. citizens is to muddle along with failed fiscal and monetary policies until we fall off this fiscal cliff or enact reforms that could right the fiscal ship. Germany and other European countries have shown the way to reform by incorporating fiscal and monetary rules in their constitutions.

The Federal Fiscal Sustainability Foundation has launched a campaign to incorporate a “fiscal responsibility amendment” in the  Constitution. The amendment would require Congress to bring expenditures into balance with revenue in the near term. The growth of federal expenditures would be capped at the long-term rate of growth in the economy. With this fiscal rule in place, federal debt could be stabilized and economic stability restored.

We support the incorporation of a fiscal responsibility rule in the Constitution. Many resolutions calling for such a rule have been introduced in Congress over the years, but none of these resolutions received the two-thirds vote required for Congress to submit the amendment to the states for ratification.

Fortunately, the Constitution provides an alternative route. Under Article V, the states can propose amendments to the Constitution through an amendment convention. Over the years, the states have submitted many resolutions calling for an amendment convention to propose a fiscal responsibility amendment. In 1979, more than two-thirds of the states had submitted such a resolution, but Congress failed to count these resolutions and call the convention.

We are challenging Congress’ failure to fulfill its responsibility under Article V of the Constitution. The Freedom of Information Act requires that Congress publish a record of the state resolutions calling for a fiscal responsibility amendment to the Constitution.

The Federal Fiscal Sustainability Foundation is also working with attorneys general in several states petitioning the Supreme Court to issue a declaratory judgment requiring Congress to count the state resolutions and call a convention.

Barry Poulson is emeritus professor of economics at the University of Colorado and a founding board member of the Federal Fiscal Sustainability Foundation.

Reprinted with permission from the Washington Times by Barry Poulson.