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Why the Compact's Balanced Budget Amendment is Best.

A basic principle of constitutional amendment design is to make the reform strong but not too strong. One must recognize that the bad actors will always try to beat the system. And there will always be a lot of bad actors involved in government. The trick is designing a reform where the political costs of violating or bypassing the reform will outweigh the benefits of staying within the system as reformed. You can’t straightjacket the system with an iron-clad purist reform because the pressure to break or bypass the system as reformed will be so great that it will never persist. Consequently, the best way to reform the system is to furnish total transparency and strong structural incentives to do the right policies, but also allow for the possibility of losing a few political battles. Also, in crafting any amendment, one must keep in mind the need to secure ratification in 38 states, 10 to 8 of which are significantly purple. This means that any reform must have cross-ideological and cross-partisan appeal. The only reform that is worthwhile is one that can fit these reality constraints while still substantially moving the system in the right direction to be worth the heavy lift of seeking 38 states and simple majorities of Congress (we have 2 states already, by the way).

The Compact's BBA was designed to fit the foregoing parameters. Most people who read it, love it. What people like is the limitation of spending to tax cash flow with the exception of borrowing under a fixed debt limit. People like the power states have to approve any future increase in that debt limit. They like the accountability created by the amendment's impoundment feature, which commands both the president or Congress to start designating impoundments when borrowing reaches 98% of the debt limit. And many folks think the requirement of supermajority approval for any new or increased sales or income taxation, with exceptions for switching to a fair or flat tax, or greater reliance on tariffs, is a great and principled cross-ideological compromise on tax limits.

Concededly, the BBA does not immediately appeal to everyone. Some folks would prefer a spending limit based on a percentage of GDP. But the problem with a locked-down GDP-based spending limit is that GDP is redefined in significant but subtle ways every couple of years. Also, GDP itself is a fuzzy concept to begin with; defining it in a tight or meaningful fashion is impossible for a plausible constitutional amendment. Consequently, the redefinition process will always be controlled directly by the very spending/borrowing addict, namely Congress/President, we need to discipline. The pressure that would be mounted on modifying what counts as GDP to allow for spending would be far greater than the pressure that is mounted on the inflation measures in so many entitlement programs because the stakes would be all encompassing. Every special interest group in Washington would be pushing, not just AARP, for distortions in the definition. Worse, the political distortion of GDP would destroy its value for all policy purposes, much as the redefinition of inflation has, causing less transparency in government policy and action over the long run.

So while we did consider GDP-based concepts, the bottom line is that they (and any other reform that hinges primarily on definitional enforcement within the sole control of Congress/President) are nowhere near as persistent a reform structure as using the time-tested model of balancing ambition against ambition and power against power. Simply put, any reform must be designed to handle a heavy load of bad actors; this means designing the reform to ensure the bad guys counter each other in their ambitions. So we incorporated the division of power and the counterbalancing of interests as the foundational principle of our BBA, much like the Constitution itself.

Additionally, the idea that unlimited debt is not the primary political cause of limitless government is simply wrong. Only unlimited debt makes possible the phenomena of politicians giving the voters everything they want at no immediate cost. This dynamic is what drives overspending and ultimately over-taxation (or default). It is why so many states attempted to limit debt in their constitutions beginning in the mid-19th century. They observed the fact that there is no natural political check to borrowing to the point of system crash by politicians driven by short-term ambitions. Unlimited debt truly is the fairy dust that makes unlimited spending and taxation possible. Create scarcity in debt and the system will be forced to make political choices with immediate political consequences, which will tend (in a society that is still 50%+ rational) to drive policy on spending and taxation in the right direction.

We also do not agree that Congress will simply max out its debt limit and get approval to raise the limit from 26 state legislatures as a routine matter. As a matter of commonsense, statistical likelihood, requiring the assent of both simple majorities of Congress and a simple majority of the States will be more difficult to overcome for increasing debt than just simple majorities of Congress and the president alone. The only question is how much more difficult. Fortunately, we have a real life experiment to point to. At last count 35 states rejected in-state Health Care Exchanges despite federal funding, patronage possibilities, and the possible loss of tax credits for their residents. 24 states rejected Medicaid Expansion which promised overwhelming federal funding and no measurable costs in the short run (the normal mindset of a politician). This experiment in the real world shows the power of grassroots opposition in state capitols. State legislators are and always will be more responsive to grassroots pressure because they are more vulnerable and more dependent on the grassroots to achieve their grand ambitions than the denizens of Washington. So long as the American people support fiscal limits, they will cause the states to be much more tightfisted than Congress. Polling data showing support for limits on debt (not limits on spending by the way, but debt) shows supermajority support persisting for decades. Under these circumstances, there is simply no way that Congress could ever bank on easily getting state referendum approval of an increase in the debt limit. It would always be a serious political battle—far more so than the debt limit debate in Congress for logistical reasons alone. For this reason, if the Compact's BBA were in place, Congress would have a fundamental sense of scarcity in the availability of debt, as well as a fundamental sense of dependency on the states. Both of these dynamics will cause a better mindset in Washington—an objective need for prioritization and a sense of humility in relations with the states. Getting beyond the initial debt limit will require a politically and fiscally plausible plan and a degree of transparency in fiscal policy that there is no hope of obtaining in the current political system before the system crashes.

Moreover, the impoundment process requires the hard political choices to be made in Washington well in advance (probably 3 to 4 months based on current spending/borrowing rates) of hitting the debt limit. If the President does not do his initial job of designating necessary impoundments, and if Congress balks too, Congress will have every reason to shift the political blame to him for the consequent disorderly automatic sequester that will hit government across the board when the debt limit is reached; so the impeachment threat articulated in the BBA for the President failing to do his impoundment duty is real. A politically-self-interested President will thus be unlikely to refrain from making necessary impoundments. Assuming that impoundments are designated, Congress would finally have a specific and transparent basis for making the case for more debt and the consequences of not increasing the debt limit, which may very well gin-up special interest support for an increase in the debt limit, but at least there will be a target for everyone to shoot at--which is not the case in debt limit debates of the past. Such transparency is absolutely essential to reforming fiscal policy. It should be going on right now in Washington, but it won’t before the system crashes because there is no structural incentive for Congress to put its neck on the chopping block when it can kick the can. Also, although there is no doubt the battle would be intense in the states, by requiring the debt debate to be conducted entirely focused on a single subject measure and outside of Washington, those reliant on federal debt spending will have a far less concrete opportunity to demagogue the effects of a denial of the debt increase because, unlike in a debt limit situation enforced directly by Congress, there would not necessarily be a clear one-to-one relationship between the powers of those that might deny debt spending (the states) and the loss of a specifically desired entitlement program. The special interests would also be spread much thinner because they would have to battle in 26 states (at least) and also preserve their influence in Congress to protect their spending interests if the debt limit increase is denied. All of these dynamics are significant structural pushes in the right fiscal direction.

We do not agree that the risk of new revenues being generated through the narrow pass we have created in the exceptions to our tax limit is so great as to resist the need for hard spending decisions to be made. But first it must be emphasized that the choice between taxes and debt is a false one. The reality is that debt is taxation. It is taxation of the worst kind—taxation without representation because it is taxation on future generations. Such debt-taxation has no natural political limit until the system crashes for the same reason that debt-spending has no natural political limit until the system crashes. The burdened future generations have no voice as the tax burden is piled on them. Thus, if we must risk a raise in revenue today for a reduction of the tax burden on future generations, that is the right and prudent thing to do. The key thing is to ensure that the system modulates the drive for revenue so that it does not itself cause an immediate economic collapse. Our BBA's tax limit does that. We have no doubt that the political difficulty of closing tax loopholes, switching to a consumption tax, or raising tariffs/fees will cause every possible spending reduction to be considered first.

Finally, our BBA is actually the simplest plausible BBA ever put to paper. State legislators already recognize its pay-as-you-go feature, its debt limit feature, and its supermajority taxapproval process. Our push in Georgia and Alaska (we only focused on 4 states, one with a heavy anti-A5 presence (AZ) and another with a supermajority vote requirement for any non-fiscal measure (AR)), resulted in a 50% success rate. Education is not difficult. And the compact approach involves 60% fewer legislative enactments and 50% fewer legislative stages than the non-compact Article V approach.

Bottom line, our BBA proposal not only works, it is the best one out there.

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