May 10, 2011
Proposition TwentyBy John McClaughry
Americans are increasingly worried about the federal government's staggering burden of debt. The federal government's gross federal debt (debt held by the public plus intragovernmental obligations) will blow past $15 trillion by the end of September. That will just surpass 100% of projected GDP, a level seen in our history only at the end of World War II.
With a government shutdown narrowly averted on April 8, members of Congress are gearing up for an even more ominous battle. In an April 4 letter to Senate leader Harry Reid, Treasury Secretary Tim Geithner explained that on May 16, the Treasury will reach its statutory debt limit. If Congress fails to raise the debt limit by that date, the Treasury can buy two more months by various extraordinary maneuvers. But by mid-July, with no agreement, the United States government cannot borrow money to meet its obligations, therefore becoming insolvent.
At some point during this timeframe, there will be a congressional agreement to increase the debt limit. This poses no problem for Democrats, although Sen. Barack Obama did vote against a debt limit increase in 2006. Most Republicans, however, cannot support a debt limit increase without winning very large concessions from the Democrats on spending, and perhaps on taxes and regulatory issues as well.
Despite their party's disappointing record in restraining debt during the eight Bush years, Republicans are once again emerging as deficit fighters. Their leading weapon, as it was thirty years ago, is the "Balanced Budget Amendment" to the Constitution.
On March 31, all 47 Senate Republicans endorsed S.J. Res. 10, known as the Consensus Balanced Budget Amendment. Like many of its predecessor proposals, the new CBBA requires that outlays cannot exceed receipts in a given budget year unless two-thirds of the House and Senate membership approve. Outlays in a given fiscal year could exceed 18% of the previous year's Gross Domestic Product only with a two-thirds vote.
Similarly, to prevent Congress from taxing its way to a balanced budget, the CBBA requires a two-thirds vote to increase tax rates. These restrictions can be waived by majority votes in time of a declared war, or by three-fifths votes in a time of a lesser military threat. A debt limit increase would also require a three-fifths vote of each house. The CBBA would take effect with the fifth fiscal year following its ratification.
Other than as a political rallying cry, it's hard to see any real prospect of such an amendment effectively restraining federal spending or taxation. The terms "outlays," "revenues," and "gross domestic product" offer opportunities for creative accounting; there is no enforcement mechanism other than, presumably, in courts facing shutdown for lack of deficit financing. Additionally, the amendment invites a desperate declaration of war against, say, Grand Fenwick to trigger the wartime waiver.
In addition, the supermajority rules -- three-fifths or two-thirds of either those voting or the full membership of the chamber -- are not only an affront to democratic tradition, but an invitation for frantic log-rolling to purchase the last few votes. Witness California's experience with such a budget approval provision.
There is, however, an anti-debt amendment available that will clearly stop deficit spending except in time of war. It was proposed in 1987 under the name "Proposition 2½," after the tax limitation measure approved in Massachusetts in 1980, because it would have set a then-unimaginable two and a half trillion dollars as the national debt limit. Its modern version is dubbed "Proposition 20" and reads as follows:
Comment: there is nothing here about calculating outlays and revenues or requiring supermajority votes. Twenty trillion dollars is all the United States government can borrow. If Congress continues to run annual trillion-dollar deficits, the $20-trillion limit will be reached in 2016. That allows five years for the states to ratify.
Comment: Some official -- normally the Secretary of the Treasury -- must sign debt instruments issued by the U.S. government. This section forbids any such official from signing when the result would push the debt over the $20-trillion limit. Even if a federal official willing to defy the Amendment could be found, legions of bond counsels would advise prospective buyers of the debt that it was not legally issued. This would make it unsalable except perhaps to uninformed individuals unlikely to have much investment money. This section also prohibits the Federal Reserve, as an institution created by the United States, from purchasing illegally issued federal debt.
Comment: This section is the enforcement mechanism. It gives standing to any citizen to seek an injunction from the Supreme Court. If the Supremes dally more than 180 days, the income tax amendment is repealed.
Comment: This section does not prevent tax increases, but it does require that the excess revenue produced be applied solely to the reduction of the debt, and it reduces the $20-trillion limit by the same amount.
Comment: This is the wartime exemption. It's not foolproof, but to evade it, Congress would have to run the risk of adopting a declaration of war and authorizing the sending of troops abroad to engage in hostilities, all because of its own fiscal irresponsibility. This could be politically dangerous.
With Proposition 20 in effect, Congress would be faced with the choice of reducing federal expenditures without raising and spending more tax revenues; else selling off federal assets, another salutary result; or persuading the Fed to increase the value of the dollar. This last escape hatch -- calamitous deflation -- would have such unpredictable consequences that even Congress might blanch at the prospect.
If the 112th Congress is serious about putting a stop to runaway deficit spending and is eager to avoid a rapidly approaching partisan debt limit showdown with potentially earthshaking political and economic consequences, passing the Proposition 20 constitutional amendment offers a very good bargain. If it seems too restrictive, could I interest you in Proposition 22?
John McClaughry, a senior policy adviser in the Reagan White House, recently retired after seventeen years as president of the free-market Ethan Allen Institute in Vermont.