Households often do not balance their budgets on an annual basis and neither do local and state governments or businesses. If households were required to balance their budgets annually, few of us would be in homes: with a mortgage a household can choose to spend more — in the case of housing, far more — than its income in a particular year.
A bond to build a new school is evidence that your local school board isn't constrained by a balanced budget law. Utah bonded to fund the reconstruction of I-15 — its spending this year will exceed its revenues. Few businesses could get started or expand without borrowing.
In short, debt is both useful and even necessary. This is true for individuals, businesses, local government entities and states. A balanced budget amendment implies that the federal government is the single exception to this general principle. The proponents provide no reasons why. Why, for example, shouldn't future generations help pay for highways they use or a war that preserves their freedom?
Many states and local governments have balanced budget laws, but they apply only to "operating expenditures" and not "capital expenditures" used to fund, for example, infrastructure and buildings (e.g., the I-15 core and a new school). A balanced budget amendment that does not make this distinction rules out this option at the federal level. Perhaps this is what the proponents want, but, if not, the language of an amendment would have to distinguish, as states do, between these two types of expenditures.
As a practical matter, however, the distinction at the federal level isn't self evident and herein lies a problem in crafting an amendment that makes sense and would work. Is the purchase of a new fighter or aircraft carrier a capital or operating expenditure? That is, would such a purchase fall within the scope of a balanced budget amendment that acknowledged the distinction between operating and capital budgets or be excluded from Constitutional constraint.
What about spending for highways, levees and the like? Operating or capital expenditures? Paying soldiers and civil servants would be operating expenditures covered by an amendment, but what about money spent to train military pilots? Operating expense or investment?
It must be obvious that an amendment which, following the model of the states, distinguished between operating and capital expenditures would not be a constraint if Congress gets to determine which expenditures are operating expenses to be funded with current tax revenues and which are investment or capital expenses and, therefore, outside of the scope of the balanced budget amendment. An amendment would have to address these distinctions, but even if it was detailed and lengthy, it could not be detailed enough to cover each of the myriad of federal expenditures.
Hence, an amendment attempting to distinguish between these two kinds of expenditures would be open to mischief. This could be avoided, but only if the federal government was treated differently than all other institutions in the economy and required to fund all annual federal expenditures, whatever the purpose, with annual tax revenues.
While this seems simple enough, it really doesn't constrain Congress if it can create agencies with bonding authority whose expenditures are off-budget. That is, Congress could locate in off-budget agencies any expenditures that exceeded its annual revenues.
So in addition to forbidding a distinction between operating and capital expenditures or being incredibly detailed in distinguishing between the two, a workable balanced budget amendment would have to forbid spending via off-budget agencies or be detailed enough to limit Congress' ability to shift expenditures between on-budget activities subject to the amendment and off-budget activities beyond Constitutional constraint.
But this still isn't enough. An effective amendment would also have to limit Congress' ability to mandate expenditures by others, be they individuals, businesses, local or state governments. Otherwise, whenever planned federal expenditures were greater than revenues, Congress could simply off load expenditures via mandates, expenditures that would not appear on its books.
Clearly, a balanced budget amendment that actually constrained Congress would have to be lengthy and detailed, quite unlike the Constitution and its current amendments. If it weren't, Congress could evade the amendment's constraints by characterizing expenditures as "capital" rather than "operating" or by moving expenditures off-budget or by mandating expenditures — each decision an open invitation to endless litigation.
But the balanced budget amendment now being touted by proponents is silent on distinctions between operating and capital expenditures; silent on distinctions between on-budget and off-budget expenditures; and silent on mandated expenditures. In short, it is at best poorly written and incomplete, and at worst naive and ill conceived.
J.R. Kearl is a professor of Economics in Provo.