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The Solution to the State Fiscal Crisis: A Five Year Balanced Budget?

Submitted by Patrick Ruffini on Sun, 02/22/2009 - 01:10
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Back in the Contract with America days, a Balanced Budget Amendment was a major tenet of Republican policy, and a couple of times, it came close enough to passing Congress to inspire furious lobbying and vitriolic sky-is-falling claims from the Democrats. 

A balanced budget requirement isn't some radical pie-in-the-sky idea. 49 out of 50 states have it. The good news is that it works -- those states are actually forced to balance their budget. The bad news is that it's often ugly, with drastic spending cuts and tax increases in many states in the current budget year. 

Albeit more responsible than rampant deficit spending at the federal level, the states aren't any less short term in their thinking than the feds. In good years, state governments rush to spend the surplus only to abruptly cancel programs in a recession -- because there's no real incentive to bank surpluses against a downturn or use state rainy day funds. A budget $5 billion in surplus is just as balanced as one with $0 in surplus, so the politicians might as well spend the money currying favor with voters.  

The only way I can think of to stop this problem is to extend the horizon of the balanced budget from one year to five years. Essentially, the budget would have to be in balance over the course of 5 years, covering most recessions with 2 or 3 years of recovery. 

In bad times, states could deficit spend -- by no more than the surpluses of the previous four years. In good times, states would be forced to bank surpluses -- particularly if the past few years were economically tough. 

One downside is that politicians use it to recreate the present, with budgets just barely in balance across the board, but more likely than not, the politically convenient thing to do would be to slip into a deficit for one or two years, thus kicking off a virtuous circle where subsequent years' budgets would not only have to be in balance, but the extra debt accumulated during a recession would have to be paid off. This could head off irresponsible spending binges in good times and keep state budgets on more of an even keel. 

It's true that budgets wouldn't have to be balanced every year -- though the overall fiscal impact is the same -- but it sure beats the farce of Washington needing to bail out the states when they run off the rails. 

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While the states have to have

Submitted by In between on Sun, 02/22/2009 - 08:48.

While the states have to have discipline in their spending, things are on the wacky side also. We have seen a trillion dollars go to Iraq draining our economy of capital. We have seen factories close as they go overseas. Cities and states cannot compete with cheap labor and globalization. There needs to be a cohesive policy in creating jobs out of Washington, and so far in recent years it has been neglected. We have seen the neglect of our infrastructure. To save industry, we bribe and pay off industry to stay here. And without that they leave. We have not invested as much in new areas to create jobs with having more science and research. Other countries are going full speed ahead and we are mired in war and debt.

This is just one situation where we bribe a company with millions of dollars to stay here. It took state and city taxpayer dollars to keep one plant. So when people say that we need to reduce taxes, we already do that as a bribe or in bailouts. A sad situation.

 This company also has a place in China, and in the future, when it is all said and done can leave for China. So with globalization, with all the millions of bribery, it all may mean nothing in the end.

http://www.thecourier.com/Issues/2008/Dec/18/ar_news_121808_story3.asp?d...

They were not serious

Submitted by lgm on Sun, 02/22/2009 - 10:00.

Back in the Contract with America days, a Balanced Budget Amendment was a major tenet of Republican policy, and a couple of times, it came close enough to passing Congress to inspire furious lobbying and vitriolic sky-is-falling claims from the Democrats.

Those deficit conscious Republicans during the Clinton years were not interested in reducing the budget, they wanted to reduce Bill Clinton.  The day he left office they repealed Paygo and launched on the biggest deficit spree in history. 

 

Doesn't game out right

Submitted by josephcollins on Sun, 02/22/2009 - 12:13.

The state budgets would never be balanced.  They'd always be "balanced five years out".

Paygo is better than balanced budget amendment

Submitted by johnson springs on Sun, 02/22/2009 - 13:49.

This is certainly a better approach than the unrealistic idea of balancing the Federal budget every year which as you show causes havoc because of a lack of flexibility in managing year to year changes in tax revenues (cash flow), etc.

That said Paygo is a better solution than a balanced budget amendment. The problem that balanced budget amendments are designed to address--that governments prefer spending to saving--should not and cannot truly be resolved with restrictive and ultimately self-defeating rules no matter how carefully and cleverly designed. The reason why balanced budget amendments will not solve the problem is that the issue of how to regulate government spending properly and necessarily resides in the political sphere. A balanced budget amendment attempts to make it non-political via rule-setting sleight-of-hand, but when push comes to shove it will still end up being resolved politically--as it should and must. That is what the public/political realm is for when all is said and done.

Because public spending priorities are inherently political, I much prefer paygo to balanced budget rules. Paygo keeps the discussion the political sphere by requiring real-time political choices when managing public spending priorities. With improved transparency, the real choices that policy makers and politicians need to make can be an open part of our political process as they should be.

Call me skeptical

Submitted by cr on Sun, 02/22/2009 - 14:05.

First, I wonder if there is any law based way of keeping politicians at bay (in either party). There's always a way to game the system. However, I would like to see something like the GAO that handles the budget numbers. Simply put, the white house, nor any of the other houses should put out budgetary numbers. With each president, the budget number get further and further from the truth.

Clinton was bad, and Bush was downright despicable.

Bitching aside, even if you have a 5 year budget, what's to stop the pols from running up deficits for four years, then having bigger havoc at five? Also, what in the case of a major war where deficits are the norm? WWII is a case in point.

However, I would like to see a "War Tax" or a deficit tax where governers could run deficits, but the next tax season, an automatic tax would pay for the previous years deficit. That would give the gov some elasticity to run deficits, but ultimately would balance out.

That's just an idea. This is a good psychology/economics incentive/disincentive / game theory question. Everyone is for a balanced budget in theory, but in practive how do you get policitians to do it.

 

 

 

The Horror!

Submitted by chemjeff on Mon, 02/23/2009 - 03:03.

However, I would like to see a "War Tax" or a deficit tax where governers could run deficits, but the next tax season, an automatic tax would pay for the previous years deficit. That would give the gov some elasticity to run deficits, but ultimately would balance out.

If you think about it, an "automatic tax" to pay for the previous year's deficit is the same thing as the union of a balanced budget amendment and never-ending spending.  And, quite frankly, I am not interested in maintaining the government's elasticity.

This is another gimmick that wouldn't work, just like the balanced budget amendment itself wouldn't work.  The problem is and has always been the spending part of the equation, and this isn't going to end until we Americans culturally reject the socialism we have become accustomed to in our daily lives.

old thread but . . .

Submitted by cr on Mon, 02/23/2009 - 10:48.

Realisticly, there needs to be some elasticity. Planning, even on a micro level, is very difficult. However, people could take your approach, and ad a flat tax. I'm for it. Then people can realistically talk about the cost. But outside of god making pols responsible, there's not law that will make humans not like spending and building things they like to spend and build.

Here is a great video on Porkulus

Submitted by MidPointMan on Sun, 02/22/2009 - 14:34.

This video has a lot of great stuff in it, and there are a few things about the sector targeting of this that are worth knowing.  This targets EXACTLY the wrong sectors...

http://www.youtube.com/watch?v=uyPcRGvtu18

The Need For A Balanced Budget Amendment

Submitted by mjackson on Mon, 02/23/2009 - 16:31.

I don't think the argument holds that because some states with a Balanced Budget Amendment spend their surpluses that it's a bad idea. In fact, the current problems states are having meeting their budgets illustrates exactly why we need one on a federal level - while painful, it forces them to make these difficult decisions and keeps the politicians from putting the burden on future generations.

I think passing a federal Balanced Budget Amendment is necessary now more than ever to stop the Bailout fever in Washington. I know there are organizations like http://www.balanceourbudget.com devoted to passing one, but this should become a bigger issue that the Republican party takes up for itself.

Culture Change more than Rules, but some rules are helpful

Submitted by TomGrey on Tue, 02/24/2009 - 11:51.

Bush's Tax Cuts were demonized almost as much as Pres. Bush himself -- but this tax cuts were good, and helpful to the economy.

Rich people do NOT need gov't bailouts, or even more gov't programs.  "America is the richest country on Earth" should mean that Americans are more able to take care of themselves than any others -- meaning fewer gov't programs "for the needy".

In bad times, it's normal and even economically reasonable for the gov't to have a deficit (best is thru a Tax Cut! -- letting taxpayers IMMEDIATELY get more cash to spend or save), but in good times it's easy for politicans to sell people on a new gov't program.

I support a Balanced Budget Amendment, but doubt that it would really be effective because to pass it would need pre-built exceptions.

As part of the effort to pass such an Amendment, there should be far more effort put into replacing "free" gov't  services with user fee supported gov't services.  Replacing gov't grants and free money subsidies with loans that are cheap money (in bad times), but have to be re-paid by those who get the loans and which increase in interest costs in the good times.

Imagine an up to $10,000 optional Tax Loan to all taxpayers, at an ARM of 1% more than the Federal Funds rate (now about 1%, so it would be a 2% loan), for the taxpayer to make new purchases.  But such a loan would have to be repaid.  Fewer folk would take these low cost loans, and when times were 'good', they would be repaying them.

Most gov't programs should be in the form of loans which must be repaid. The corruption of democracy is that power-elites capture the treasury and, in the name of the 'people', grant themselves ever larger slices of free gov't money.

Republicans can't afford it.

Submitted by RisingTide on Tue, 02/24/2009 - 12:06.

their base is in the rural/suburbs/exurbs, where people are HeAVILY SUBSIDIZED by other people's money to live out there.

Sure, it sounds all nice and happy "user fee supported services" -- but everyone thinks that this will mean those shiftless grifters in the city -- where in fact it really means most every voting Republican would be charged more than every voting Democrat.

Take that a step further -- that's more money for me to donate to Obama, if I should so choose. More time, too, because I won't have to work hard for the roads that you (suburban you, if you aren't) use to travel to work.

Boomers are the dumbest generation in American History. They thought they were entitled to not paying taxes, having as many wars as they wanted, and letting all of our jobs go overseas so that they could have Cheap Chinese Crap. There will be a reckoning, of course, as there always is. So if you're a boomer, don't be entitled -- the 'givens' have already evaporated. what's left is figuring out what the new givens will be.

How exactly do you charge a user fee for something like medicaid? veterans benefits? I sorta get roads -- you do that with tolls. But what about schooling?

The problem is bias

Submitted by LnGrrrR on Tue, 02/24/2009 - 15:05.

Look at approval ratings. Everyone says their senator is better than the nation at large. This happens with all sorts of experiences. People are more willing to bet money that is given to them rather than earned, for instance.

The same goes for spending. Every constiuent wants other people to cut their spending, but not their own. When it is suggested that their funding gets cut, many will point to others and say, "Why should I cut mine if they won't cut theirs?"

And so, we get this game of economic chicken.