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News from EPI Nobel laureates and leading economists oppose constitutional balanced budget amendment

A group of leading economists including four Nobel laureates in economics released a letter to President Obama and Congress opposing a constitutional balanced budget amendment today.

The letter outlines the reasons why writing a balanced budget requirement into the Constitution would be “very unsound policy” that would adversely affect the economy. Adding arbitrary caps on federal expenditures would make the balanced budget amendment even more problematic, the letter says.

The Economic Policy Institute and the Center on Budget and Policy Priorities organized the letter.

“A balanced budget amendment would mandate perverse actions in the face of recessions,” the letter notes. By requiring large budget cuts when the economy is weakest, the amendment “would aggravate recessions.”

The signatories of the letter are: Nobel laureates Peter Diamond, Eric Maskin, Christopher Sims, and Robert Solow; Alan Blinder, former vice chair of the Federal Reserve System’s Board of Governors and former member of the Council of Economic Advisers; Henry J. Aaron, chair, Social Security Advisory Board; Claudia Goldin, Harvard University professor and former president of the American Economic Association; and Laura Tyson, former chair of the Council of Economic Advisers and former director of the National Economic Council.

The full text of the letter is below.

Dear President Obama, Speaker Ryan, Minority Leader Pelosi, Majority Leader McConnell, and Minority Leader Reid,

We, the undersigned economists, urge the rejection of proposals to add an annual balanced budget amendment to the U.S. Constitution because it is very unsound economic policy. Adding additional restrictions, such as an arbitrary annual cap on total federal expenditures, would make a balanced budget amendment even worse.

A balanced budget amendment would mandate perverse actions in the face of recessions. In economic downturns, tax revenues fall and some outlays, such as unemployment benefits, rise. These built-in stabilizers increase the deficit but limit declines in after-tax income and purchasing power. To keep the budget balanced every year would aggravate recessions.

Unlike many state constitutions, which permit borrowing to finance capital expenditures, the federal budget makes no distinction between capital investments and current outlays. Private businesses and households borrow all the time to finance capital spending. A balanced budget amendment would prevent federal borrowing to finance expenditures for infrastructure, education, research and development, environmental protection, and other investments that are vital to the nation’s future well-being.

A balanced budget amendment would invite Congress to enact unfunded mandates, requiring states, localities, and private businesses to do what it cannot finance itself. It would also invite dubious accounting maneuvers (such as selling more public lands and other assets and counting the proceeds as deficit-reducing revenues) and other budgetary gimmicks. Disputes on the meaning of budget balance would likely end up in the courts, resulting in judge-made economic policy. So would disputes about how to balance an unbalanced budget when Congress lacks the votes to inflict painful cuts.

Balanced budget amendment proposals typically contain escape hatches, but in peacetime they require super-majorities of each chamber of Congress to adopt an unbalanced budget or to raise the debt limit. These provisions are recipes for gridlock.

An overall spending cap, which is part of some proposed amendments, would further limit Congress’s ability to fight recessions through either the built-in automatic stabilizers or deliberate changes in fiscal policy. Even during expansions, a binding spending cap could harm economic growth because increases in high-return investments — even those fully paid for with additional revenue — would be deemed unconstitutional if not offset by other spending reductions. A binding spending cap also would mean that emergency spending (for example, on natural disasters) would necessitate reductions elsewhere, leading to increased volatility in the funding of non-emergency programs.

A constitutional amendment is not needed to balance the budget. The budget not only attained balance, but actually recorded surpluses and reduced debt, for four consecutive years after Congress enacted budget plans in the 1990s that reduced spending growth and raised revenues. This was done under the existing Constitution, and it can be done again. No other major nation hobbles its economy with a balanced budget mandate. There is no need to put the nation in an economic straitjacket. Let the President and Congress make fiscal policies in response to national needs and priorities as the authors of our Constitution wisely provided.