Budget Talk with Tom and Ralph

Jefferson and Emerson could teach us a lot about balancing the books.

"The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.…Suppose Louis XV and his contemporary generation had said to the money lenders of Holland, give us money that we may eat, drink and be merry in our day; and on condition that you will demand no interest till the end of nineteen years, you shall forever after receive an annual interest of 12.5 percent. The money is lent on these conditions, is divided among the living, eaten, drunk, and squandered. Would the present generation be obliged to apply the produce of the earth, and of their labor to replace their dissipation? Not at all.…[T]he laws of nature impose no obligation on them to pay this debt. And although, like some other natural rights, this has not yet entered into any declaration of rights, it is no less a law, and ought to be acted on by honest governments."
—Thomas Jefferson

"Nothing in nature can be mismanaged for long."
—Ralph Waldo Emerson

There have been proposals for a balanced-budget amendment since the earliest days of the Republic. Jefferson first suggested it. The State of New York seconded the notion, asking that a balanced-budget provision be included in the Bill of Rights. The first Congress thought about it, but somehow it didn't seem necessary. So the constitutional provision to balance the budget never got passed.

And nobody seemed to miss it. For about 150 years, the budget was more or less in balance—without any constitutional requirement—and the country prospered. Jefferson's proposal was so thoroughly forgotten that when the idea reemerged a few years ago, it seemed brand new. And it was, almost. The state legislators who took the lead in proposing it were responding to the changed condition of federal finances with a remedy that has been almost universally applied at the state level—constitutional restraint on deficits.

Beginning in 1975, legislators in four states spontaneously invoked Article V to call for a limited constitutional convention for the specific and exclusive purpose of drafting a balanced-budget amendment. It is fair to say that they were not motivated by theoretical considerations but practical ones. They saw the federal budget slipping out of control. They were aware of the practical value of balanced-budget requirements in their own state constitutions.

The experience in Maryland is particularly important in this respect because Marylanders, led by State Senator James Clark, were instrumental in spreading the convention-call movement to other states.

Like most other states that later adopted constitutional requirements for a balanced budget, Maryland originally placed no restrictions on the legislature's ability to spend. As a result, state finances were constantly in a shambles. Dogged by a poor bond rating, the state faced bankruptcy early in the century. A commission established to reform state finances, chaired by the president of Johns Hopkins University, recommended that a very strict balanced-budget provision be inserted in the state's constitution. The provision prohibits the legislature from raising spending beyond what is proposed by the governor. The amendment was adopted in 1916 and had the intended effect. It seemed reasonable to legislators that similar restrictions at the federal level would work.

These restrictions need to be in the form of a constitutional amendment. Federal balanced-budget statutes, such as the Gramm-Rudman-Hollings plan to eliminate deficits by 1991, can be easily overridden or simply ignored by a Congress that finds budget-cutting impolitic. Only a constitutional amendment can bind Congress to balance the budget in any other way than by throwing ever more burdens onto the taxpayers' backs.

To date, 32 states have officially petitioned for a constitutional convention to draft such an amendment. Despite a hullabaloo about the alleged dangers of a convention, other states seem poised to call for an amendment. One of these days, Congress will have to propose it—or stand by while a convention does.

This brings the meandering of history full circle. We are back to Thomas Jefferson's idea that the borrowing powers of Congress should be constitutionally restricted. This raises two questions: 1) If we could scrape by for so long without a balanced-budget requirement, why do we need one now? 2) If we do need an amendment, why did the deficiency remain hidden so long? One answer to both questions is found in the change in America's monetary constitution.

Through a gradual process, stretching out through much of this century, politicians have managed to sever the connections that anchored the currency to gold. The last, weak link was broken by President Richard Nixon on August 15, 1971. On that date, he ended the convertibility of the dollar into gold. From then on, there has not been a single surplus at the federal level. And the average size of deficits has literally shot up, from $6 billion a year during the 1960s to more than $200 billion a year today. Even adjusting for inflation, this is a staggering increase. In just 14 years since the link to gold was severed, the nominal debt of the United States has quadrupled. In short, there is strong circumstantial evidence linking the deficit crisis with the floating of the dollar.

This is not a coincidence. When the politicians at last slipped free of the gold-reserve system, they also slipped free of a restraint that effectively limited deficits. Under the old regime, the threat of the inflationary consequences of massive deficits could generate an almost immediate deflationary reaction. So long as the monetary base was tied directly to gold, spending decisions were restrained by a political cause and effect as tight as anything the constitution could explicitly ordain. Had politicians indulged in unbridled deficit spending in the past, they would, in most cases, have found the political purpose of this spending disappointed.

Rather than ensuring its members reelection, a profligate Congress would have ensured its defeat. Here's why: Alarm over deficits would have induced people to turn in dollars for gold, thus contracting the monetary base. Contracting the monetary base brings a recession or depression. A recession or depression leads to the defeat of incumbent politicians. Therefore, in order to avoid defeat, politicians for the most part avoided deficits as long as the dollar was tied to gold.

Of course, there were exceptions at wartime, for obvious reasons. War not only changes the structure of the economy, it alters voters' attitudes toward economic hardship. Furthermore, the United States has suspended gold convertibility at wartime. The fact that this was necessary also suggests that gold convertibility placed a limit on deficit spending.

In this perspective, the current campaign to constitutionally limit deficit spending is not, as some opponents have charged, an attempt to impose restrictions where none previously existed. To the contrary, it is an attempt to improvise a replacement for past restrictions that the Congress has now escaped.

In all likelihood, a balanced-budget amendment will not limit the spending prerogatives of the Congress as severely as did the old monetary regime. For an amendment to do that, it would probably have to mandate reductions in M1 for every percentage point the budget is in deficit. The old monetary regime worked more or less that way, and it did not allow Congress the luxury of a two-thirds or three-fifths override. In a choice between a draconian cut in deficit spending and a draconian reduction in the money aggregates, politicians would have to choose the spending every time. Or to put it more positively, they would never allow the deficit to run out of control in the first place.

The orgy of deficits over the last decade-and-a-half was an attempt by politicians to have what cannot be had: benefits without costs. This, as Emerson said, is impossible. "Though no checks to a new evil appear, the checks exist, and will appear." The emergence of the balanced-budget amendment is no less than one would expect. If it had not emerged, it would indicate that our system was completely petrified. As stiff as a rock. In fact, however, the system is more like a thick, sedimentary sludge. It doesn't respond easily and quickly. But it is fluid enough that it can be made to move. Energy in the citizen can compensate for the mismanagement of the politician.

That is the most wholesome place for the compensation to arise. But one way or another, arise it must. There is no such thing as something for nothing. Not now. Not ever. "The sure years reveal the deep remedial force that underlies all facts." Every defect or excess inspires some remedy. That remedy may be postponed. It may be made more painful. But it comes, inevitably. For the same reason that trees do not grow to the heavens, deficits cannot grow to the heavens.

All debts are ultimately discharged. Even national debts. They may be discharged by repudiation, inflation, or collapse. They may be discharged by running surpluses, as Jefferson sought to discharge the debts of the Revolution. But one way or another, every debt is discharged. And even those that appear to be shirked are paid by someone, somewhere. As Emerson said, "Everything has its price, and if that price is not paid, not that thing but something else is obtained, and that it is impossible to get anything without its price, is not less sublime in the columns of a ledger than in the budgets of states."

It is easy to imagine that justice is always getting the short shrift. This is true if we view justice in individual terms. But we should not view it that way, any more than we should judge the compensatory forces of the market in terms of individual transactions. For example, the fact that the market will tend to weed out cheats does not mean that you will not be cheated when you next buy something. The fact that the market stimulates progress does not mean that the next mousetrap you buy will be better than the last one.

All compensatory mechanisms are defective in individual cases. (For more on this, see Professor F.A. Hayek's work on social justice.) So it is in macropolitics. Read the papers and you see stupid arguments and selfish pleading dominate political debate. Read history and you see that the distribution of injustice is always in the right hands. Brute force seems, at times, to have its way. But every evil, once set in motion; every intervention and economic distortion, once pursued, creates its own compensatory reaction.

This is no less true of runaway deficit spending. The politicians who seem to have escaped all bounds are actually in the process of being trapped by overwhelming forces of economic adjustment. It is just that cause and effect are linked together with a long rubber band. The adjustment mechanisms for inflationary and expansionary excesses are always deflationary and contractionary. As the deficits continue and the interest on the compounding debt is capitalized, the contractionary consequences will be ever more difficult to elude. In time, they will be overwhelming.

In short, just because the feedback loop is longer does not mean that it is weaker. Quite the contrary. The longer the deficit solution is delayed, the more powerful the deflationary forces become. If the balanced-budget amendment is not adopted soon, the politicians will someday wish it had been. One way or another, we will someday have to set our ledgers right and begin to discharge the debt. In this light, the balanced-budget amendment is not only an expression of the compensatory mechanism at work, it is the easy way out. That's why I expect that it will soon be adopted.

Contributing Editor James Dale Davidson is founder and chairman of the National Taxpayers Union in Washington, D.C. and author of The Squeeze.