Drafting a federal balanced budget amendment that does what it is supposed to do (and no more).

• Author: Seto, Theodore P.

CONTENTS

1. What Is the Amendment Supposed to Do?

   1. Why a Balanced Budget?

      1. Institutional Responsibility

      2. Intergenerational Equity

      3. Economic Prudence

      4. Reconciling Competing Values

   2. Why a Constitutional Amendment?

   3. Other Normative Issues

      1. Enforceability

      2. Flexibility

      3. Political Neutrality

      4. Constitutional Nondisruption

2. Defining the Budgetary Target

   1. Accounting for Spending and Income

      1. Treatment of Unpaid Obligations

      2. Treatment of Capital Expenditures and Receipts

      3. What is Cash?

      4. What is Debt?

      5. Constitutional Implications of a Choice of Accounting

      Methods

   2. Scope of the Amendment

   3. When to Test

   4. Accommodating Fiscal Policy

3. How to Get There

   1. Setting Annual Targets and Deciding Whether They Have Been

      Met

   2. Imposing a Remedy

      1. Debt Ceiling Limitations

      2. Predefined Default Solutions

      3. Process-Based Solutions

      4. Incentive-Based Solutions

      5. Who Should Decide?

   3. Waiving the Amendment: Who, When, and How?

4. Conclusion

   Appendix

   "[I]n constitutional matters, as in others, the devil is in the details."(1)

   Efforts to propose and ratify a constitutional amendment to balance the federal budget have been ongoing for almost twenty years,(2) culminating in the repeated narrow defeat of Senate Joint Resolution 1 (the "1995-96 Senate Draft")(3) in March 1995 and June 1996. History suggests that the same draft, or one very similar, will be introduced again. Recent shifts in the makeup of Congress have increased the likelihood of passage.(4) In any event, proposals for a federal balanced budget amendment are likely to remain politically central for the foreseeable future.

   Most of the public debate on this issue has centered around whether such an amendment, in the abstract, is a good idea;(5) little has been written about the formidable technical problems involved in drafting a balanced budget amendment that does what it is supposed to do.(6) This is, perhaps, understandable. The scholarly community tends to defer technical analysis until after an amendment clears Congress. Proposals for a federal balanced budget amendment present further problems. First, they implicate two fields not usually linked: constitutional law and accounting. Few constitutional scholars feel comfortable tackling accounting issues;(7) accountants, in turn, do not often write about the Constitution. Second, there is a dearth of satisfactory models from which to work: Amendment proponents perceive the Gramm-Rudman-Hollings Act(8) and other legislative approaches(9) as inadequate,(10) and the experiences of states with similar constitutional provisions remain controversial.(11) Finally, analysis of balanced budget amendment drafts has been hampered by the differing motives of its proponents. For some, the goal is simply to require a balanced federal budget. For others, the goal appears to be to limit the size and power of the federal government -- to enact, in effect, an "antifederalist" amendment to the United States Constitution.(12) These different goals raise different technical problems and invite technical imprecision.

   In any event, balanced budget amendment drafts have not evidenced adequate attention to technical detail. The 1995-96 Senate Draft, for example, seems to have been written with primarily political, not technical, considerations in mind. Not surprisingly, close analysis reveals serious technical flaws. Without greater attention to technical detail, future proposals are likely to perpetuate those flaws. This would be unfortunate. A poorly drafted amendment might facilitate nominal compliance -- that is, literal compliance with an inadequate numerical test -- while failing to require adherence to the underlying values that the amendment is supposed to protect. Nominal compliance with a poorly drafted amendment might, in turn, provide political cover for continued budgetary irresponsibility. A poorly drafted amendment might also trigger or exacerbate economic instability. At worst, such an amendment might even cause a meltdown of the world's financial system. In sum, a poorly drafted amendment could trigger a series of economic and constitutional crises while leaving unsolved the problem it was ostensibly intended to address.(13)

   This Article will not attempt to address whether either a balanced budget or a constitutional amendment to require one is a good idea.(14) Nor will it explore the technical problems that would need to be resolved by a well-drafted antifederalist amendment.(15) Instead, it will focus on the technical problems presented in drafting, implementing, and interpreting an amendment, the goal of which is simply to require a balanced federal budget. At first glance, these problems may appear ministerial. details that members of Congress and constitutional scholars may be tempted to leave to others. Their resolution, however, has profound implications for the success of the amendment and the structure of American government. Even the broadest issues cannot be understood or thoughtfully addressed without attention to technical detail.

   There is, of course, no single technically correct approach to most complex policy issues. Technical competence must serve broader goals. In Part I, I will explore what a balanced budget amendment is supposed to do. I will first examine why we want balanced budgets at all, the answers, I suggest, should influence how we define our budgetary target. Second, I will review current theories as to why a constitutional amendment may be necessary; again, identification of perceived procedural or other defects in current decisionmaking processes may shed light on the procedural or other enforcement mechanisms an effective amendment might need to institute. Finally, I will posit four additional normative characteristics of any well-drafted federal balanced budget amendment: (1) a balanced budget amendment should be enforceable; (2) it should nevertheless permit carefully delimited degrees of flexibility in its application; (3) it should be politically neutral -- that is, it should not change or distort political decisionmaking, intentionally or inadvertently, except to require a balanced budget, and (4) it should not disrupt our existing constitutional system except as is absolutely necessary to accomplish its purposes. Some will disagree with these premises. My goal in Part I is not necessarily to persuade the reader that I am right. It is rather to urge greater attention to normative premises, to challenge those who disagree to be explicit in their disagreement and in their analysis of the implications of different normative assumptions for technical structure.

   In Part II, I will then address a first set of technical problems, those involved in defining the budgetary target. I will examine four issues: choice of accounting methods; scope of the amendment, when in the budgetary process the amendment should test compliance, and how well the amendment accommodates fiscal policy. Failure of an amendment to address the first three thoughtfully, I will argue, may permit Congress to comply nominally while largely frustrating the amendment's ultimate purposes. Failure to accommodate fiscal policy adequately may result in economic destabilization and possibly economic catastrophe. I will conclude that the solution adopted in the 1995-96 Senate Draft is deficient in both these respects.

   Finally, in Part III, I will examine three major procedural problems in enforcement: who interprets and defines the budgetary target and determines whether it has been met, how a violation of the requirements of the amendment is remedied, and how and in what circumstances the requirements of the amendment may be waived. First, I will conclude that if the amendment is to be effective, the rules used to define the target and decide whether the target has been met must be subject to outside review by an independent scorekeeper. Second, I will review possible solutions to the problem of remedy, with special attention to those incorporated in the 1995-96 Senate Draft, and conclude that there is currently no fully satisfactory solution to the problem. Finally, I will argue that waiver of the amendment should be permitted by supermajority legislative vote, but without the exceptions some have suggested for economic emergencies. I will conclude that the solutions to important enforcement issues adopted in the 1995-96 Senate Draft are flawed in important respects.

   I do not claim to have all the answers. I do bring an unusual perspective to the problem: For most of my professional life I have worked with financial anticircumvention rules -- the rules of the Internal Revenue Code -- and with the analytic methods of tax policy, which, like a balanced budget amendment, often attempts to induce behavioral change along one axis without distorting behavior along others. Viewed from this perspective, some balanced budget amendment issues are currently susceptible to sound technical resolution. Others require further work. I conclude, however, that any broadly acceptable, technically sound balanced budget amendment would differ significantly from the 1995-96 Senate Draft in ways that neither proponents nor opponents have yet fully considered.

1. What Is the Amendment Supposed to Do?

   1. Why a Balanced Budget?

   I do not propose to undertake a critical examination of the arguments for or against a balanced budget. My purpose here is much more limited. Assuming that we as a nation decide to mandate balanced federal budgets, we should identify our reasons clearly, so as to permit the drafting of a budgetary target consistent with those reasons. Proponents make many arguments in favor of a balanced budget. Ultimately, I suggest, they reflect three principal values, with sometimes inconsistent implications for the definition of budgetary targets.(16)

1. Institutional Responsibility

   One of the most common arguments in favor of a balanced budget is to avoid national "bankruptcy."(17) Technically, of course...