By Barry W. Poulson
Two decades ago, Nobel Laureate James Buchanan, founder of the public choice school of political economy, proposed a Fiscal Responsibility Amendment to the Constitution. His proposal led to a lively discussion with other scholars, which was published in ‘The Living Constitution: Amendments for the 21st Century.’ This year, a new effort is underway to enact a Fiscal Responsibility Amendment in the Constitution, reviving this living constitution tradition.
In the last two decades of the 20th century, the U.S. experienced a ‘Great Moderation’ in macroeconomic policy. More prudent fiscal policies eliminated deficits and reduced federal debt as a share of the Gross Domestic Product. Fed Chairmen Volker and Greenspan pursued rules-based monetary policies that reduced inflation to target rates. During this ‘Great Moderation’ in macroeconomic policy, the economy experienced rapid economic growth.
Over the last two decades, however, fiscal responsibility has been abandoned. Total federal debt as a share of Gross Domestic Product has increased to more than 100% and the U.S. has emerged as one of the most heavily indebted nations in the world. Under current law, deficits are projected to increase over the next three decades, and the ratio of debt to Gross Domestic Product is projected to increase to more than 200% by midcentury. After two decades of fiscal and monetary stimulus, the Fed is now increasing interest rates sharply to combat inflation. The economy has entered a new era of stagflation not unlike that of the 1970s. It is difficult to imagine a more chaotic combination of fiscal and monetary policies, the era of ‘Great Moderation’ is clearly at an end.
Buchanan perceived this dramatic shift in fiscal and monetary policy, arguing that fiscal responsibility would return to center stage in public discussion in the 21st century. He noted the fiscal impact of terrorism and natural disasters that added to the natural bias toward deficit spending. He also pointed out the risks of increased shares of U.S. debt held by Asian counties. But he could not have foreseen the fiscal impact of the financial crisis in 2008, and the coronavirus pandemic in 2020.
As Buchanan argued, Congress has missed many opportunities to enact a Fiscal Responsibility Amendment. In 1982 Joint Resolution 58 was proposed as an amendment to the Constitution, requiring for each year’s federal budget that ‘total outlays are no greater than total receipts’, without a three-fifths majority vote of both houses. Exceptions would allow for debt financing in emergencies such as major wars or natural disasters. Buchanan proposed a Fiscal Responsibility Amendment similar to Joint Resolution 58. Congress failed to reach the two-thirds majority vote required to pass Resolution 58, and over the years has failed to approve similar fiscal responsibility measures.
We have learned a great deal about fiscal rules in recent decades. The challenge is to impose constraints on spending and revenue while providing the flexibility to respond to economic shocks. Annually balance budget rules, such as that proposed by Buchanan, lack the flexibility to respond to economic shocks. Fiscal rules that have proven to be effective combine a structural balance rule with constraints on deficits and debt. For example, the Swiss debt brake was enacted as a constitutional fiscal rule through citizen initiative with support from 85% of the Swiss population. The Swiss debt brake requires structural balance with deficits offset by surpluses over the business cycle. A cap on spending is linked to the growth of the Swiss economy. A cap is also imposed on deficits, and when the deficit cap is reached the spending limit is reduced until the budget is again in balance. A Swiss-style fiscal rule has been adopted in other European countries and the European Union. This fiscal rule has enabled Switzerland and other European countries to significantly reduce debt as a share of the Gross Domestic Product.
In our book “Restoring Sustainable Macroeconomic Policy in the United States,” John Merrifield and I simulate Swiss-style fiscal rules for the U.S. We find that if these fiscal rules had been in place over the last three decades, we could have balanced the federal budget and reduced debt as a share of Gross Domestic Product, just as the Swiss have. Unfortunately, the U.S. now faces a debt crisis. It will be very difficult to close the fiscal gap and stabilize debt as a share of the Gross Domestic Product over the next three decades, even with Swiss-style fiscal rules in place.
Buchanan was well aware of the challenges facing rules-based fiscal policy. Fiscal rules are procedural rather than substantive constraints, subject to interpretations by the courts that can weaken and undermine fiscal responsibility. Even with fiscal rules in place, special interests and politicians can through ordinary democratic processes impose higher taxes and borrow to finance a greatly expanded public sector. Ultimately the success of fiscal rules depends on the will of citizens. In some countries, cultural dependence is so ingrained in public attitudes that a large unproductive rent-seeking welfare state is inevitable. Toward the end of World War Two Friedrich Hayek, in his famous tract ‘Road to Serfdom’, suggested that this outcome was likely in western democracies. Buchanan suggested that in the 21st century western democracies were again on this path to dependency. Nonetheless, he proposed a Fiscal Responsibility Amendment as an alternative path, before rules-based fiscal policy is completely abandoned.
A Fiscal Responsibility Amendment could be proposed under Article V either by Congress or by the states through an amendment convention. A convention called for enacting a Fiscal responsibility Amendment would assure that such a constitutional change would reflect a broad consensus of support among citizens. Proponents of a Fiscal Responsibility Amendment argue that Congress has failed to acknowledge or count state resolutions calling for the Amendment, which is a clear breach of their mandatory and ministerial duty under Article V. This year Representative Jody Arrington, Republican Texas, and cosponsors have introduced legislation that would require Congress to record and count these applications, and when the requisite two-thirds of state have proposed the Amendment, to call the convention.
Surprisingly, much of the criticism of this effort to enact a Fiscal Responsibility Amendment through an Article V amendment convention has come from the political right. Critics argue that this effort could result in a runaway convention and undermine what they perceive to be a strict originalist interpretation of the Constitution. William Niskanen, in his contribution to ‘The Living Constitution: Amendments for the 21t Century’, argued that a strict originalist interpretation of the Constitution does not presume that the Framers got everything right, either for their generation or for ours. A strict originalist interpretation means that demands for constitutional change must be through the Article V processes for amending the Constitution. Niskanen emphasized the important distinction between the written Constitution and the effective constitution. The effective constitution requires only a majority of both houses of Congress, approval by the President, and a majority of the Supreme Court. “In other words, we have politicized and democratized the process of constitutional change to the point that the written Constitution is no longer even a parchment barrier to constitutional change”.
As Buchanan and Niskanen argued in “The Living Constitution: Amendments for the 21st Century”, we can no longer leave fiscal policy to the discretion of elected officials, the era of ‘Great Moderation’ is at an end. Buchanan concluded that “fiscal irresponsibility stares us in the face and calls for correction”. An Article V convention to incorporate a Fiscal Responsibility Amendment in the Constitution could provide the necessary correction.