Feature Article

Yes, Mr. Pallister, There is a Balanced Budget Amendment

by   John Robson

Contents                                  MAY 1994

Editor's notes
Yes Mr. Pallister, there is a balanced budget amendment
Do you remember where you were when we hit the wall?
The minimum wage and worker training: two sorry companions
The illogic of food banks
May quotation
May graph
John Robson, chump
Sweet deals
Competition and property rights
How would a personal expenditure tax affect me?
May questions and answers
Profit without honour
Government-created poverty
Institute staff
Today's Liberal

Editor's notes

S INCE THE LAST ISSUE OF Fraser Forum, the Canadian dollar has fallen significantly and interest rates have surged upward. Like most Canadians, I am worried about these trends. They are indicative of the concern Canadians and foreigners alike have about Canada's high and increasing debt load.

Some financial advisors in Canada, certain that these trends point to an imminent currency crisis which will be followed by direct intervention by the IMF, tell their clients to move physically what assets they can out of the country and to use their Canadian dollars to buy foreign currency (whatever the dollar is valued at now, they say, currency exchange is a bargain compared to what it will be) and to hold that currency outside of the country, too. (At least one advisor is so confident that this crisis will happen soon that he has sold his house and is holding that money offshore.)

As I drive to work through a district of pleasant homes, an abundance of new cars and obvious signs of real estate development and small business activity all around, it is so difficult to believe the doomsday predictions. Where does the truth lie? Won't all this fearmongering on the part of some financial advisors simply make any disaster we are to face happen sooner?

In this issue of Forum, Michael Walker discusses whether or not Canada has in fact "hit the wall." Meanwhile in the feature article, John Robson examines balanced budget amendments in the United States and suggests them as one part of the solution for averting a crisis here.

With this issue the Institute is pleased to introduce a new contributor to Fraser Forum: Karen Selick. Karen is a lawyer and a columnist for Canadian Lawyer. We feel certain that you will find her columns as sensible and insightful as we do.

Yes Mr. Pallister, there is a balanced budget amendment

John Robson

Mr. Brian Pallister, MLA

Portage la Prairie Constituency

Winnipeg

Dear Mr. Pallister:

In response to your letter of July 14, 1993, I have investigated this matter and find that you are correct not only in thinking that "some U.S. jurisdictions" have balanced budget provisions, but also in thinking that they work.

They do not work perfectly, however, but that is because they are frequently too weak in their drafting or else lack sufficient enforcement provisions. Too many such provisions are legislated rather than constitutional, too many fail to cover all types of government borrowing, and too many are not enforced adequately by the courts.

Nevertheless, the American experience shows that we would be well advised to incorporate into our federal and provincial constitutions a clause such as the following:

Notwithstanding any other provisions of this Constitution, the Parliament shall not recommend any bill, nor shall her Majesty accede to any recommendation of a bill, save in time of war or grave national emergency, under which an actual or projected excess of spending over revenues by the federal government shall exceed 1 percent of the GDP in any fiscal year, nor any bill whose effect is to increase all accumulated debts and obligations of the federal government beyond the sum of 10 percent of GDP. Any unfunded liabilities accruing to the Federal Parliament shall be deemed to be a part of deficits and accumulated debts with respect to the limitations in this clause.

It is of significant importance that this be a constitutional provision and not a law. This consideration does present certain difficulties for Canada, though not insurmountable ones. Before dealing with these, let us examine the American experience.

The existing situation

To begin with, all but two of the states, Vermont and Wyoming, United States General Accounting Office, Balanced Budget Requirements, March 1993, (GAO/AFMD-93-58BR), p. 1. - Note.  have balanced budget requirements in their constitutions (35 of them) or in law (13). Thus it was hypocrisy on the part of Michael Dukakis in 1988, for instance, to have boasted of balancing however many budgets in a row as governor. He had no choice, but did not support a federal constitutional amendment to put Washington under the same discipline.

The good guys

On the face of it, the way people line up over balanced budgets certainly suggests their desirability. Thomas Jefferson, famous for observing that the best government is the one that does the least, is also on record as saying, "I place economy among the first and most important virtues, and public debt as the greatest danger to be feared." In a 1798 letter to John Taylor he wrote, "I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the genuine principles of its constitution; I mean an additional article, taking from the federal government the power of borrowing." Thomas Jefferson, quoted by Harry E. Figgie, Jr., with Gerald Swanson, Bankruptcy 1995, p. 185; Lewis Uhler, Setting Limits, p. 151.- Note.

The bad guys

By contrast, when Ronald Reagan asked for a balanced budget amendment to the U.S. Constitution in 1982, a majority of the Republican-controlled Senate (but not the necessary ) gave it to him. Democratic House Speaker Tip O'Neill, knowing his troops couldn't actually cast a recorded vote against it, used his position and his mastery of procedure to prevent it ever coming to a vote. See for instance National Review, February 13, 1987, p. 60, National Review, June 19, 1987, pp. 62-63. -Note.

Playing with fire

This has potentially explosive consequences, incidentally, because the alternative in the U.S. to a Constitutional Amendment being approved by of the Congress and then of the states is for of the states to petition for a Constitutional Convention. But the problem is that last time a Constitutional Convention met to revise the Constitution, in 1787, they threw it in the fire and wrote a totally new one.

Despite this risk, such a petition drive is now well under way; as of 1987, 32 of the necessary 34 state legislatures had voted for it. Three of these have now rescinded their resolutions but it is unclear whether this has any force or not. The usual suspects are trying to stop it. Tip O'Neill's son, as Lieutenant-Governor of Massachusetts, helped found an organization to stop the resolution drive in his state. Both the California and Montana Supreme Courts (in that order) ordered referenda on the balanced budget off the ballot before they could be voted on. National Review, June 19, 1987, pp. 62-63; Balanced Budget Requirements, p. 1; Uhler, op. cit., p. 187. -Note.

In fact Californians have been at war with their Supreme Court for some time, and recently dumped its Chief Justice. After this you can see why.

The Americans are playing with constitutional fire, and the stakes keep getting higher. This alone suggests it is serious business.

Part of the reason the fight is taking the form it is is that other remedies, including legislative ones, do not seem to work nearly as well as constitutional ones.

How the states got into debt

These do work. The discipline of constitutional provisions is real. In my studies of the U.S. (which was my main academic specialization), however, the issue of state or local debt never really came up. My instant reaction at this point in this letter, therefore, was to say that the measures have worked and that states and localities do not accumulate debt. However, I checked the November 1992 OECD Economic Survey of the United States, and it too left the issue more or less untouched. All it really said was that the widening of budget deficits in the 1980s was mostly "the result of larger Federal government deficits, as the state and local surplus has, until the recent recession, been fairly stable.OECD Economic Survey of the United States, November 1992, p. 49. - Note.

The states do borrow

However, the Statistical Abstract of the United States 1992 (Washington: Bureau of the Census, 1992) lists accumulated state and local debt in 1990 at $860 billion. This number worried me considerably (though less than the federal debt of $3.266 trillion) until I found that of that, "only" $318 billion is state, and $542.3 billion is local (what constraints local governments operate under I do not know, but clearly a lot of their borrowing is through dedicated bonds for various infrastructure projects, that is, for investments backed by tangible assets). By 1990 the U.S. federal government accounted for about 56 percent of all government revenue, and 63 percent of all spending, but 80 percent of the debt, while state governments accounted for about a third of all government revenue and about a quarter of all government expenditure, but well under a twelfth of all government debt. At least in 1990, state government debt was growing more slowly than either revenue or expenditure (this was also true of local government, but not of Washington).

This is good, but it is far from perfect. The states have racked up less debt than Washington relative to their spending, but they have accumulated it. So these constitutional provisions have had some effect, but have not been completely successful, and it is worth pondering why not, and what holes effective balanced budget legislation must block.

As National Review noted a couple of years ago, while Washington's deficit in fy 1991 was an appalling $318 billion, state and local governments were by then also running a combined deficit, of some $40 billion. "Ten [U.S. states](California, Connecticut, Florida, Massachusetts, Michigan, New Jersey, New York, Rhode Island, Texas and Virginia) each have deficits this year [1991] of $1 billion or more. Oregon and West Virginia have big surpluses."National Review, June 10, 1991, pp. 24-26; The Economist, June 22, 1991, p.25. -Note.

Blame Washington

So perhaps this discipline is somehow breaking down. To understand the extent to which it is--and the extent to which it is not--it is important to realize that a lot of the problem is the fault of the federal government. The twentieth century has seen a dramatic increase in the role of the U.S. federal government as against that of the states. "Sixty years ago American government had a simple divide. Washington dealt with defence and foreign policy. The states did everything else, from roads to schools." In 1929 Washington was spending 3.2 percent of national income, state and local governments 9 percent (and more than half of that for education and highways). Federal, state and local income support, Social Security and welfare were under 1 percent of national income. In the 1980s total federal, state and local spending had hit around 40 percent of national income.The Economist, February 9, 1991, p. 27; The Freeman, April 1989 p. 140; in 1950 it was 25 percent, in 1985 44 percent (p. 142). -Note.

He who pays the piper

As in Canada, when Washington got really expansive it began shovelling money at the states in return for dictating how that money would be spent. In fiscal year 1992 federal grants for payments to individuals (mostly welfare and Medicaid) will be 62 percent of federal grants to the states. And for Medicaid Washington pays on average 56 percent; this program rose from 3 percent of state spending in 1970 to 12 percent today. At first, as in Canada, this seemed like endless free money. And the states responded: while the federal government remained fairly constant at 2.7 million employees from 1968 through 1982, state and local government workers increased some 6.4 million between 1968 and 1979. "States employ roughly 150 people for every 10,000 Americans, compared with 110 in 1970." "While the U.S. population grew by 9 percent in the 1980s, state employment grew by 19 percent. There are now 150 state employees for every ten thousand citizens."The Economist, Feb. 9, 1991, p. 18; The Economist, Feb. 9, 1991 p. 19 (and The Economist, March 23, 1991, p. 32); John Naisbitt, Megatrends, p. 120; The Economist, June 22, 1991, p.26; National Review, July 29, 1991, p. 30. -Note.

If anything did go wrong, Washington was a bottomless pit of money for the states. During the 1974-75 recession 24 states had to borrow from federal government to pay jobless benefits--in early 1980 $13 billion of this debt was still outstanding. L. M. Greene, Free Enterprise Without Poverty, p. 64. -Note. Washington kept on giving the states money, and their budgets swelled accordingly.

He who no longer pays the piper

When some semblance of restraint hit with the arrival of Ronald Reagan, the states went right on spending madly even though the federal contribution was dropping. The federal government share of state spending was about 18 percent by 1991, as against 26 percent in 1980. By 1990, for instance, Washington spent about 7 percent of the total government expenditure on education, state and local 93 percent; in 1980 the federal government had spent 10 percent.

The Economist, March 3, 1990, p. 28. -Note.

"Aid from Washington dropped from 25 percent of state budgets in 1980 to less than 20 percent in 1991." But this is not much more than a semblance of restraint; as National Review noted, "Since 1987, payments to the states and cities have leapt from $108 billion to $159 billion--a 20 percent real increase."

Part of the problem for the states is that when Washington began cutting back on its largesse for political reasons (which bite later than constitutional ones) it didn't stop telling the states what to spend, or how. "Medicaid, which provides health coverage for the poor, accounts on average for 14 percent of state budgets, but is largely beyond their control." And "[the 1990] budget-summit agreement dictated some $10 to $15 billion in spending by the states." It certainly doesn't help that according to the Supreme Court, federal judges in the United States, though they cannot order state tax increases, can order states to order tax increases in order to pay for programs the judges say are necessary. As The Economist commented, "No previous judicial decision has gone so far in removing the power of taxation from the people."

The Economist, June 22, 1991, p.26; on federal orders with respect to Medicaid spending see The Economist, July 20, 1991, p. 33; National Review, July 29, 1991, p. 29; The Economist, April 28, 1990, p. 26; The Economist , April 28, 1990, p. 27; see also Chronicles, April 1991, p. 45 re: a 1985 Supreme Court decision "that the Congress could control the way localities in the states deal with their own municipal employees..." -Note.

The fault lies not in our stars but in our states

But the real problem lay with the states themselves. The Economist estimated in 1991 that "They look set to assemble a combined deficit of $30 billion-50 billion." It noted that this "compares with an aggregate $8 billion deficit in the year just ending [1991], despite a total of more than $10 billion in state tax increases during fiscal 1990." Moreover, "In 1981 they [U.S. states] had reserves equal to 8 percent of annual expenditure. Now reserves are under 2 percent." The Economist asked how the states could be in financial trouble, and answered, "49 have constitutional or legal requirements that insist they balance their books. Some states, though, have two-year budgets, allowing deficits to be racked up in the first year; others have laws that can easily be bent." It noted dryly about the increased concern of U.S. governors and legislators about money that "Most of these politicians refuse to follow effect-record budget deficits-back to principal cause, a decade of runaway state spending." The Economist, June 22, 1991, p. 25. -Note.

As National Review noted, "Average state budgets rose by a brisk 104 percent in the 1980s. But in California and Virginia spending climbed by 120 percent; in Massachusetts and New Jersey, 135 percent; in Connecticut and Florida, 170 percent. Today, all of these once highly esteemed states are awash in red ink." Indeed California, the biggest absolute offender with a budget deficit projected for 1992 at $14.3 billion, can only blame itself. As The Economist notes, "Califor-nia's plight has developed over a long period: state revenues have risen by 8 percent a year for a decade, expenditures for 11 percent a year."

National Review, July 29, 1991, p. 3 (state and local spending on education doubled in the 1980s, to $188 billion); The Economist, June 22, 1991, p.25. -Note.

The devil's in the details

The U.S. General Accounting Office Study Balanced Budget Requirements confirms The Economist's analysis of the weakness of existing mechanisms: the reason these devices have been less effective than they might otherwise have been is that the various constitutional provisions or laws only cover the general revenue fund, not various off-book items, they often do not require year-end balances but only balanced budget projections, and their enforcement mechanisms are often ineffectual.See Balanced Budget Requirements, esp. p. 3. -Note.

At this point you may be nearing despair about constitutional balanced budget requirements, but in fact even in their imperfect form they have been somewhat effective.

Early warning

The states really started misbehaving very recently, and didn't get away with it for long at all. "By now, only a handful of America's states still merit a triple-A rating from Standard and Poor's on their general-obligation bonds. New York gets only a single A, Massachusetts a barely respectable triple-B." And New York has been collecting very high taxes since the mid-1970s. But "when Governor Mario Cuomo announced earlier this year [1991] that New York is `broke to the marrow of its bones,' he could have been describing the sorry financial plight of thirty other states as well. Latest forecasts suggest that state governments may spend $30 billion more than they collect in taxes this year."The Economist, June 22, 1991, p. 81; see for instance The New Republic, May 6, 1991, p. 22; incidentally New York City alone was looking at a budget in the $28.7 billion range for 1991--and for what? (The Economist, June 1, 1991, p. 19); National Review, July 29, 1991, p.29. -Note.

High visibility

So the good news is that, because of the balanced budget amendments and despite the various wheezes used to try to evade them, the problem became visible much more quickly. For one thing, "State taxes per person almost doubled--from $658 to $1,150--between 1980 and 1989." There was no hiding what was going on, from bond raters or from citizens. And because they can see the results right away, people can react in ways that put pressure on governments. "Census Bureau data shows that from 1980 to 1989, one thousand people each day packed their bags and moved from the ten states that raised their tax burdens the most."

National Review, July 29, 1991, pp. 30, 31; cf. National Review, June 10, 1991, p. 6. -Note.

Our situation is worse

By contrast, the ability of government in many of our provinces to run deficits rather than raising taxes to cover this same pattern of irresponsible spending has meant that their problems became much worse before they became visible. It is sobering, even scary, to ponder the fact that while our federal debt, at some $450 billion Canadian in 1992, was perhaps of the U.S. federal debt of $3,266 billion U.S. in 1990 (on a population and economic base about the size), our provincial debt of some $200 billion Canadian is close to half that of all the U.S. states combined, still on a base the size.

Why we can't jump over the wall

Our experience confirms what theirs shows, namely, tax increases don't help. As Reagan said, (the Congress) has been spending money like drunken sailors, except for the salient fact that the money drunken sailors spend is their own. And you certainly couldn't control drunken sailors' spending by giving them more money. Thus a series of record tax increases under Reagan and Bush did not help, and studies have become notorious showing that every new dollar in federal taxes over the past four decades has produced more than $1.50 in new spending. By now "To retire the [national] debt would require a stack of thousand-dollar bills 204 miles high." And by 1986 "it took the individual income tax from everybody living west of the Mississippi River just to pay the interest on the federal debt." And this was despite the total receipts of the federal government increasing from $618 billion in 1982 to $1.016 trillion in 1987. Chronicles , April 1991, p. 45--Frank Bryan, coauthor of The Vermont Papers, urging that Vermont secede; Chronicles, February 1989 p. 16; Martin Anderson, Revolution, p. 176. -Note.

At one point it looked as though the U.S. federal budget was under control; the federal deficit, which was some 5.2 percent of GNP as recently as 1983, was by 1988 down to 3.3 percent. And the states' and cities' pension fund surplus was about 1.2 percent of GNP. Combined "public sector borrowing requirement," therefore, was 2.1 percent of GNP, half of the 4.1 percent figure for 1975. The reduction in the federal share was fully accounted for by a fall in spending, from 24.3 percent of GNP to 22.3 percent.

The American Spectator, February, 1989, p. 15. -Note.

Then came the 1990 budget deal, chock full of tax increases, and the federal deficit skyrocketed (not helped, to be fair, by the Savings and Loan debacle). By fy 1990 revenue was $1.155 trillion, but spending had risen to $1.393 trillion and the deficit was back up to $238 billion. Statistical Abstract, p. 279. -Note.

And it has only gotten worse since. Clearly tax increases cannot do it alone.On this see for instance James C. Miller III's piece in Policy Review, Spring 1989 #48, p. 17. -Note.

Why laws don't work

Unfortunately, and this is the part of my reply you may find the most depressing, legislative controls--like the U.S. Gramm-Rudman Act, or various expenditure control measures by our own federal government--apparently can't do it either. The condition of our provinces and of Ottawa suggest that legislative restraint is not very reliable. But perhaps it was not tried here. So again it is useful to ponder the American record, because at a federal level there have been no end of legislative measures going back at least to the 1974 legislation creating Budget Committees in House and Senate (oddly, this is exactly when the problem really emerged). Gramm-Rudman wasn't totally ineffective; from 1975-85 federal spending increased an average of 11 percent per year, while in the years 1985-88 (Gramm-Rudman) it was "only" 4 percent, and the deficit came down to about 3 percent of GNP National Review, January 27, 1989, p. 49 (real deficit 4.4 percent of GNP 1985, 2.2 percent 1987, 2 percent 1988 (p. 50). -Note.

But Gramm-Rudman shows graphically why mere laws don't work, especially if badly drafted. It only mandated projected deficits within the limits, not actual ones; and sometimes even that was too much. In one particularly appalling display of cynicism in 1987, "By a 50-46 vote that went roughly along party lines, the Senate ratified a clause in the Democratic budget that stated it satisfied Gramm-Rudman--even though by its own estimates it would leave a deficit $25 billion higher than the maximum $108 billion the law allows."

Daily Texan, April 29, 1987, p. 3. -Note.

The government also helped meet Gramm-Rudman limits by selling assets and counting them against spending, which actually increased even as the "deficit" fell in fy 1987. See for instance the Houston Post, October 22, 1986, p. 14A. One last point worth of note, since often it is alleged that cutting deficits is an anti-visible minority ploy, is that a National Opinion Research Center poll of black Americans found, among other things, that 90 percent favoured a constitutional amendment to balance budget (85 percent supported the free enterprise system) (by James Watt, The Courage of a Conservative, p. 68).-Note.

As a last dreadful warning on this subject, while the U.S. federal debt increased 6 times from 1968-88, to $2.1 trillion, borrowing from off-balance federal agencies (i.e. FCS and FHLMC) had increased 25 times, to $536 billion.The Economist, July 2, 1988, p. 66. -Note.

Of course, we have the same problem: about of the provincial debt in B.C. is actually off the balance sheet, being Crown Corporation debt. This is a hole that any balanced budget law or amendment must plug.

Of course politics is hard to manage. Consider, for instance, that the U.S. Congress exempts itself from its own minimum wage and sexual harassment laws, and that in its relentless quest for reelection "sends out 12,000 pieces of mail for every letter it receives."  Reason, June 1989, p. 16. -Note.

There is little reason to think it will pass binding laws on itself (or obey them if it does). It is also noteworthy in this context that the provincial government here in B.C. apparently regards Ottawa's refusal to go on writing blank cheques for the provinces as (a) the central fact of national politics and (b) a "savage" attack on the finances of B.C. See The Globe and Mail, May 15, 1992, p. B6, quoting Premier Mike Harcourt. -Note.   But at the same time, it is cutting its transfers to the municipalities and it requires them by law to balance their budgets. Whoever writes a law can change it, so political solutions are unlikely to work.

The constitutional solution

The bottom line is that Washington has piled up debt a lot faster, and a lot higher, than the states have. So the record shows that jurisdictions with constitutional requirements for balanced budgets accumulate debt much more slowly than those without, but legislative requirements, like tax increases, tend not to work.

This is more of a problem for Canadians than it may seem, because constitutional limits on government, of any sort, pose much graver difficulties in a Parliamentary system than is often appreciated. In B.C., the current government while in opposition endorsed the referendum and recall, only to find in office that they really were not compatible with governing at all. In this case I criticize the flip, not the flop, because I do not approve of these devices in Parliamentary systems.

By the same token, it will not be easy to bring in a constitutional requirement of the sort that interests you in Manitoba. It may require there, and elsewhere in Canada, much more of a revolution in the fundamental structure of our public policy than people like Pierre Trudeau or Joe Clark seem to have understood.

However, I must warn you that, whatever the difficulties involved in placing effective constitutional limitations on a parliamentary government, provincial or federal, the difficulties in placing effective legislative limitations on such a government, or any kind of government, are much greater. The historical record shows this, both here and in the United States. So the constitutional solution, albeit difficult, is also correct.

The popular solution

Ultimately, any balanced budget provisions, or any other provisions, must be underpinned by an alert public opinion. As Judge Learned Hand wrote, "'liberty lies in the hearts of men and women; when it dies there, no constitution, no law, no court can save it." Cited in Chronicles, April 1994, p. 27.-Note.  In the U.S. as here it is an open question whether it still lies there. But the very fact of debating these measures might go a long way toward creating such a public opinion.

All these things are worth bearing in mind when devising constitutional restraints on government. The enterprise is tricky. But the essence of my reply is that yes, they do have them in most U.S. states, yes, they work, and yes we need them here, in Manitoba, in all the other provinces, and federally.

Good luck with your endeavours, and thank you for your interest in our views.

Yours sincerely,

John Robson

Policy Analyst

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