Policy Documents

Clarifying Confusion About the Balanced Budget Amendment

James Buchanan –
September 1, 1995

The structural flaw in our fiscal politics reflected in the regime of continuing budget deficits did not arise in the 198Os, and it will not go away in the ordinary politics of the 1990s and beyond. The structural flaw requires structural correction, that is, constitutional constraint that will, effectively, change the basic rules for the fiscal game. How and why did the U.S. political structure get into the current pattern of acknowledged fiscal irresponsibility? If we understand how and why we got here, we may begin to understand how we might get out.

The first century and one-half of our national political history did, indeed, embody a norm of budget balance. This rule was not written into the constitutional document, as such, but rather it was a part of an accepted set of attitudes about how government should, and must, carry on its fiscal affairs. Politicians prior to World War II would have considered it to be immoral (to be a sin) to spend more than they were willing to generate in tax revenues, except during periods of extreme and temporary emergency. To spend borrowed funds on ordinary items for public consumption was, quite simply, beyond the pale of acceptable political behavior. There were basic moral constraints in place; there was no need for an explicit fiscal rule in the written constitution.

The balanced budget norm is ultimately based on the acceptance of the classic principles of public finance. These elementary principles were overlooked in the Keynesian macroeconomic theory developed in the 1930s and 1940s. The government budget was seen to offer an instrument through which a wise and benevolent government could fine-tune the economy so as to promote the commonly desired objectives of full employment and economic growth. In this vision, any constraint on the exercise of governmental discretion in setting rates of taxes and spending could only reduce the efficacy of the macroeconomic enterprise.