The balanced budget amendment introduced by Senate Republicans yesterday contains a striking error. As written, it would limit federal spending much more than they claim or, I suspect, intend (I said the same back in 2011, when this first came up).
The senators want to balance the budget by limiting spending rather than raising tax revenues. They thus propose the following, according to a press release from sponsor Senator John Cornyn:
Requirement to Balance the Budget. With limited exceptions, the federal budget must be balanced.
Presidential Requirement to Submit a Balanced Budget. Prior to each fiscal year, the President must submit to Congress a balanced budget that limits outlays to 18 percent of GDP.
18 Percent Spending Cap. With limited exceptions, Congress must limit outlays to 18 percent of GDP.
That 18 percent figure is in line with average tax revenues over the past four decades, but well below average spending, which has been about 21 percent.
So what's the error? The way the amendment would implement the spending limit:
Total outlays for any fiscal year shall not exceed 18 percent of the gross domestic product of the United States for the calendar year ending before the beginning of such fiscal year, unless two-thirds of the duly chosen and sworn Members of each House of Congress shall provide by law for a specific amount in excess of such 18 percent by a roll call vote. (Emphasis added.)
The amendment thus doesn't limit spending to 18 percent of the current fiscal year's GDP; it limits it to 18 percent of GDP in the previous calendar year.
At first glance that may not sound like much. But it works out to be 21 months during which inflation and real growth will almost always be boosting GDP. For example, fiscal 2014 starts in October of this year. If the amendment were effective today, spending would be limited to 18 percent of last year's GDP—that's calendar 2012, which started (of course) in January 2012.
That 21-month lag has a big effect on the spending limit. Consider fiscal 2018, the first year it could conceivably take effect (because of a waiting period in the amendment). The Congressional Budget Office projects that nominal GDP that year will be $20.9 trillion. So the Republicans' fiscal 2018 spending limit ought to be 18 percent of that, a bit less than $3.8 trillion. But the amendment would look back to calendar 2016 to set the limit. CBO estimates that year's GDP at roughly $19.1 trillion, nearly $2 trillion less than for fiscal 2018. The amendment would thus limit fiscal 2018 spending to a bit more than $3.4 trillion. That's only 16.4 percent of GDP that year, about $330 billion less than the Republicans' stated goal.
If you do the same math for the remaining years in CBO's latest outlook, fiscal 2019 through 2023, that gap never falls below $300 billion.
The same drafting error came up when GOP senators introduced a balanced budget amendment in 2011. When I wrote about it then, several commentators suggested that perhaps it wasn't an error, but rather a sneaky way to try to limit spending even further. I am not so cynical. Drafting a spending target based on GDP isn't easy, since you don't know what future GDP will be. So I can understand why someone drafting this might try to use a measure of GDP that's already known, albeit subject to much revision. But they goofed.
It's disappointing that no one has fixed this error in the intervening 18 months. I am not a fan of an arbitrary constitutional limit on spending—even with a supermajority escape valve—but as a fan of arithmetic, let me offer one simple approach: use a GDP forecast from whatever entity is responsible for the spending forecast. For the president's budget submission, that would be the Office of Management and Budget, and for the congressional process it would be either CBO or the House and Senate Budget Committees. That would make the GDP forecast even more politically sensitive, of course, but it's better than a formula that misses its intended target by $300 billion each year.
This Article's Word Cloud:AugustBudgetCancelCarbonChangeDebtDecemberEconomicsEmailFebruaryFollowHouseJanuaryJulyJuneLimitMarchNovemberOctoberPoliticsSeptemberTaxesThataboutaccountamendmentbalancedbillionbudgetcalendaremailerrorevenfirstfiscalforecastlesslimitmuchpercentspendingthanthatthistrillionwhichwillwouldyearyour
Any ideas and opinions presented in Self Directed Investor content are for informational and educational purposes
only, and do not reflect the opinions of BNK Invest, Inc. or any of its affiliates, subsidiaries or partners.
In no way should any content contained herein be interpreted to represent trading or investment advice.
None of the information contained herein constitutes a recommendation that any particular security, portfolio,
transaction, or investment strategy is suitable for any specific person. All site visitors agree that under no
circumstances will BNK Invest, Inc,. its subsidiaries, partners, officers, employees, affiliates, or agents be
held liable for any loss or damage caused by your reliance on information obtained. Read Full Disclaimer.
SDI is associated with: ValueForum.com --
a subscription-based online social networking forum of over 1000 individual investors. | MarketNewsVideo.com --
videos appearing on SDI are produced by Market News Video. | TickerTech.com -- stock
quote content appearing on SDI is at least 20 minutes delayed and is
powered by Ticker Technologies. | GoldStockStrategist.com -- Edited by Scott V. Nystrom, PhD, Gold Stock Strategist provides analysis on
gold mining companies.