Balanced Budget Amendment

November 5, 2023November 19, 2023 George Noga

Balanced Budget Amendment

BBAs are doomed to fail – far too little – far too late

GEORGE NOGA
NOV 5, 2023

In recent months, highlighted by the hi-jinks in Congress, there have been renewed calls for a balanced budget amendment, or BBA. Over 80% of Americans say they favor a BBA to the Constitution. Is a BBA good medicine that would help get us on the right fiscal path; or, is it smoke, mirrors and maskirovka that would beguile Americans into falsely believing government is making progress toward solving the spending crisis? This post resoundingly answers that question.

a pile of twenty dollar bills sitting on top of each other

The threshold issue about a BBA, is the definition of budget. Does it apply to total government spending, to the so-called primary budget (which excludes interest on the debt) or only to non-defense discretionary spending? Any BBA excluding interest is worthless. That is akin to a family with ginormous debt claiming its budget is balanced excluding interest on its mortgage, auto loans and credit cards. Interest on the debt soon will balloon to $1.5 trillion, as rapidly maturing low-rate debt is being replaced by significantly higher-rate debt. A BBA that addresses only the primary budget would result in a $1.5 trillion – and rapidly increasing – annual deficit.

Ten Biggest Flaws Of a BBA

There are many questions and flaws with a BBA; following are only the top ten.

How is budget defined; what does balanced mean?
Do we balance annually or over an entire economic cycle?
Are wars and natural disasters excluded and how are they defined?
How do we deal with off-budget entities like Fannie, Freddie and USPS?
How about supplemental funding legislation?
How are loan guarantees handled; do they constitute spending?
Can regulations be used instead of taxes to shift spending to the private sector?
Are there any restraints on imposing new user fees?
What about using the tax code to fund expenditures and incentives?
Are mandates (such as Obamacare) permitted?

It is clear from the above that there are myriad paths around, through, over and under a BBA to eviscerate it. There would be untold unintended consequences such as imposing tax increases instead of cutting spending to comply with a BBA. It is impossible to take the politics out of politics.

Hard Truths About Balancing the Budget

Politicians could define a BBA to include only non-defense discretionary spending. They could allow for many years of transition and backend load the spending cuts – many of which will never happen. Even this very limited objective (it excludes, entitlements, interest and defense) is an impossibility as it would require spending cuts approaching 100% of the remaining budget.
Politicians could seek to balance only the primary budget. However, even that is impossible. In FY 2022-23 the US had a deficit of $2 trillion which includes interest of $900 billion. Balancing the primary budget would entail cuts of $1.1 trillion – equal to 20% of all spending including Social Security, Medicare, pensions and other mandatory spending. If cuts to Social Security and Medicare are excluded, the remaining budget would have to be slashed by 60%.
Balancing the total budget – except for defense and interest – would require an immediate and permanent cut in everything else, including Social Security, Medicare and pensions, of over 40%. This also is an impossibility.

The ultimate hard truth is America is past the time when even drastic spending cuts can prevent a crisis. A BBA would buy us only a few more months of spending madness.

The ineluctable truth is that nothing will work no matter how the budget is defined because we have dug the debt hole too deep and we still are furiously digging it even deeper. If a meaningless BBA were to pass, politicians would spare no hyperbole congratulating themselves and Americans would be beguiled into believing something positive had happened when, in reality, it was a giant nothingburger.

It Really Is Not a Spending Crisis

Calling it a spending crisis is a misnomer. At its heart it is a moral crisis that cannot be addressed until Americans understand its gravity and are prepared to make some incredibly difficult and painful choices. The ultimate hard truth however is that we are well beyond the time even for difficult spending choices to make a difference. We can delay the crisis, but cannot prevent it. A balanced budget amendment would be nothing but a mirage to buy America a few more months of spending madness.

© 2023 George Noga
More Liberty – Less Government, Post Office Box 916381
Longwood, FL 32791-6381, Email: mllg@cfl.rr.com

The Spending Crisis: Monopoly Money

May 17, 2020May 16, 2020 George Noga

Americans are not accustomed to thinking about currency risk; this needs to change.

The Spending Crisis: Monopoly Money

By: George Noga – May 17, 2020

My last post on May 10, 2020 established new all-time MLLG records for forwards and reader feedback. If you missed it, go to www.mllg.us to understand what all the hullabaloo is about. It was one of the most consequential posts in my 13 years of blogging – until this post. This post may be even more consequential!

I now can see clearly how the spending crisis plays out and, as a corollary, how better to prepare for it. Due to an unforeseen confluence of events, the end game came into focus. More time at home due to coronavirus restrictions allowed for discernment. Second, mountains of new pandemic-related debt made the crisis imminent. Third, as shown in my May 10th post, we have passed the point-of-no-return and are nearing critical mass. Fourth, I read excerpts from a new, unpublished book by Ray Dalio, arguably the most astute investor of our era, that crystallized my thinking.

Possible Government Responses to the Spending Crisis

There are five main ways government can respond to the crisis: (1) cut spending; (2) raise taxes; (3) default and/or restructure; (4) seize pension assets; and (5) print money. The first two options clearly are untenable. Spending cuts would need to be so deep and tax increases so huge the social cost would be unacceptable. Moreover, such actions would need to be sustained for decades – an impossibility. Default would be too painful as the defaulted debt represents someone’s assets. Seizure of pension assets (by converting them into government pensions) would be a hard sell. That leaves option five – print monopoly money. BINGO! (See our 5/12/19 post for more on this.)

Government will print money because it is expedient, poorly understood by most people and results in the least (apparent) pain. Printing money and inflating (basically the same thing) historically has been the go-to choice for governments with their backs against the wall. It is likely there also will be token spending cuts, tax increases and other actions, but they will be more symbolic than consequential. Congresswoman Rashida Tlaib’s proposal to issue trillion dollar coins may not be that far fetched.

A few words about timing. The analysis in my May 10th post shows the debt ratio at 169% in 2025 and 264% in 2030. That makes the onset of the crisis no more than 5 to 10 years away – perhaps less. Ray Dalio has stated the US is in the seventh inning of its debt crisis – that means he believes we are 78% of the way to Gotterdammerung!

Preparing for the Crisis – Protecting Your Family and Your Assets

Readers always ask what measures can be taken to prepare for the crisis and I am frequently asked what I am doing to prepare for the inevitable. At this juncture, I am taking the most obvious, commonsensical and lowest-risk actions described below. Note: My posts of 10/14/18 and 10/21/18 (on website) discuss these issues in depth.

1. Firearms: Although I strongly support the second amendment, I do not presently own firearms. The debt crisis will be accompanied by a high probability of civil unrest, breakdowns of law and order, interruptions of public services and financial chaos. Therefore, I am reevaluating and likely will acquire guns and ammo.

2. Gold: I will begin investing in gold, precious metals and hard assets. Initially, this will be 5% of my portfolio – perhaps increasing to 10% over time. It also is wise to keep a supply of small denomination gold and silver coins at home for use in a crisis.

3. Currency: Americans are not accustomed to thinking about currency risk. This needs to change. Per Ray Dalio, Americans need to think about currencies in the same way they think about holding any other asset. I am diversifying my currency risk with a foreign bank account denominated in a foreign currency and by buying bond funds that focus on highly rated bonds in currencies of countries with low debt ratios.

4. TIPS/Long Bonds: The hardest hit asset when the monopoly money starts flying off the printing presses will be long-dated bonds. I am divesting such assets. I also will take a position (5% to begin – more later) in TIPS to protect against hyperinflation.

The above measures are only initial responses; there will be more to come. It appears my analysis and writing about the spending crisis soon will be validated. I derive no pleasure whatsoever from this and wish I was wrong. I do take some small consolation however, if I am able to help readers better prepare for the inevitable.

Next Sunday: A memorable posting about school choice and the LGBTQ issue.

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More Liberty Less Government – mllg@mllg.us – www.mllg.us

Balanced Budget Amendment No Holy Grail

March 19, 2014April 3, 2016 George Noga

By: George Noga – Updated March 10, 2014

A balanced budget amendment (“BBA”) is favored by 80% of all Americans in the belief it will, once and for all time, force fiscal discipline on the government. They are putting way too many eggs in the BBA basket. Watch out what you wish for. If there is a BBA, all those eggs will end up scrambled into a rather unpalatable omelet.

There are myriad paths through, over, under and around a BBA. In short, it would not be worth the paper it was written on – assuming it can garner two-thirds majorities in Congress and ratification by 38 states. Following is a partial list of ways a BBA could be eviscerated.

A BBA appears simple but is complex. How do you define budget; what does balanced mean; what is a tax? It would be the only part of the Constitution that could be waived.
What are allowable exceptions such as for military actions and natural disasters? There will be escape hatches big enough to drive a truck through. Whatever exceptions are carved out for some things, expect many more of such things. How would waivers work?
How would a BBA deal with economic cycles? Revenues can both skyrocket and plunge from year to year. Are we to slash spending in a recession and be profligate in a boom? How do we define recession and boom? How is a BBA to be managed over the course of an entire economic cycle without opening to door to great mischief?
Lawsuits will tie up a BBA for decades and federal judges will wind up with enormous power to change it. Consider how the federal bench has dealt with desegregation and busing; they still are entangling themselves over 60 years after the initial ruling.
How do we distinguish capital expenditures from annual expenses? Surely, the argument will go, a BBA was not meant to include infrastructure spending that has a life of 50 years. If capital is treated differently, more expenditures will be classified as such.
How do we address off-budget spending such as by Fannie, Freddie, USPS and the Federal Reserve? Who will prevent government from creating scores of new off-budget entities? Do we exempt interest on the debt; what happens when interest rates skyrocket?
Watch out for so-called special taxing districts; these are favorites of local government with 50,000 nationwide. If they are not under the BBA ambit, they will mushroom.
Are Social Security, Medicare, Medicaid and civilian/military pensions to be part of the regular budget? Are they no longer to be considered off budget entitlements?
User fees will sharply increase and the government will be creative in imposing new ones. Be prepared to pay handsomely for everything you get from Washington – how about $100 to file a paper income tax return or $50 to get into a national park?
Loan guarantees will become de rigueur as a way to fund programs off budget. After all, a loan guarantee is not an expenditure – is it?
Instead of direct taxation, costly new regulations will flourish. Rather than spend tax money, Congress will bypass taxes and accomplish the same result through regulation.
The tax code can be used for far more than raising taxes subject to a BBA. It can be larded with tax expenditures, incentives, penalties and all sorts of tomfoolery.
Don’t forget mandates. Since the ObamaCare mandate survived judicial scrutiny, what is to stop government from substituting mandates for taxes or spending? The feds could mandate that states, counties, cities (and even people) spend money not subject to BBA.
A budget can be balanced with tax increases. This would strictly comply with a BBA but tax increases are certainly not what BBA proponents intended.

Reluctantly, I have come to the view that a BBA is not the answer because: (1) we would expend lots of energy (perhaps for naught) enacting a BBA better spent elsewhere; (2) it will not work for all the reasons noted supra; (3) it would beguile us into falsely believing the problem is solved once and for all; (4) many of us would declare victory and move on while the other side would keep fighting; and (5) you can’t take the politics out of politics.

The solution is to remain engaged permanently, albeit this is contradictory to human nature. Once a problem appears solved, we tend to go back about our private business. But big government and its acolytes never stop and neither must we. As seductive as it may seem, a balanced budget amendment is fool’s gold; it is not the Holy Grail.