The Compact's Powerful Debt Limit-Part 2 of 7


This posting is the second in a 7 email series explaining the Balanced Budget Amendment at the heart of the Compact for a Balanced Budget. Previously, we explained that section 1 of the model Balanced Budget Amendment ensures that the federal government cannot spend more than cash on hand from ordinary revenue sources and plain vanilla full faith and credit borrowing. The question left from the last email is naturally how much full faith and credit borrowing is available to be spent under the Amendment? Here is what section 2 of the model legislation says: “Outstanding debt shall not exceed authorized debt, which initially shall be an amount equal to 105 percent of the outstanding debt on the effective date of this article. Authorized debt shall not be increased above its aforesaid initial amount unless such increase is first approved by the legislatures of the several states as provided in Section 3.” Section 2 limits the amount of available borrowing capacity or “outstanding debt” to no more than the “authorized debt,” which is set at 105% of the full faith and credit debt that exists on the ratification date of the Amendment. That means, if $20 trillion in treasury bonds existed on ratification, then the amount of available borrowing capacity is fixed “initially” at $21 trillion. The extra 5% in authorized debt thus allows for another $1 trillion in debt spending before borrowing capacity is exhausted. The most important thing to underscore here is that the Amendment allows the federal government the ability to borrow within a fixed limit. The federal government can pay down the “outstanding debt” and thereby free up the “authorized debt” for future borrowing. If managed responsibly, by paying it down in good times, the initial line of credit will certainly be large enough to manage ordinary governmental operations. And if managed irresponsibly, the federal government’s spending will be limited by Section 1 of the Amendment to no more than what ordinary revenue sources bring in—taxes and income like fees, fines and property sales proceeds, which are free and clear of continuing obligations. There is a significant benefit to allowing the federal government a specific amount of borrowing capacity. It means that the federal government will have a strong incentive to preserve the value of the dollar. If, for example, the federal government’s borrowing capacity is limited to $21 trillion, then a reduction in the economic value of the dollar also reduces the economic value of the federal government’s borrowing capacity. If excessive money printing makes a dollar worth half as much in terms of what it can buy, the federal government’s borrowing capacity will be worth half as much as well (because it is limited to a specific dollar amount). Thus, section 2’s specific dollar constitutional debt limit creates a strong incentive for the federal government not to allow the Federal Reserve to excessively print money, which would devalue the dollar. Therefore, the fiscal interests of the federal political class will be aligned with sound money policy. There is no exception from the section 2’s constitutional debt limit except as state legislatures may approve specific increases in the federal government’s initially “authorized debt.” Such flexibility is reasonable because there may be unforeseen emergencies that justify more than what the initial level of borrowing capacity can sustain. At the same time, the most important feature of the state approval process is that it injects external discipline and fiscal control into federal borrowing above the initial debt limit. No longer will Congress—the debt addict—have the unilateral power to borrow as much as it wants. No longer will the same hands that make appropriations be relied upon absurdly to refuse to borrow money to pay for those appropriations. No longer will a body that has forgotten how to balance its budget be relied upon to use debt wisely without limit. Instead, the states will have an oversight role, with expertise stemming from the fact that nearly all of them are familiar with limited borrowing capacity, the need to prioritize, and balanced budgets. If only because of uncertainty over the states’ willingness to authorize more borrowing capacity, Congress will have no choice but to husband its use of debt and prioritize its spending. The option of freely sending the bill for current spending to future generations will no longer exist. Institutional jealousies—Congress wanting to avoid begging the states for more borrowing capacity—will favor fiscal moderation at the federal level, instead of federal overreach. At last, Congress will have a very strong incentive to maintain balanced budgets whenever it is reasonably possible.

But that’s not all—the state legislative approval process has many other benefits and safeguards against abuse, which are detailed in section 3 of the model legislation, and discussed in the next posting.

#nonpartisanbalancedbudgetamendment #compactforamericacoreprinciples

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