By trading the possibility of new tax revenues for a constitutional debt limit and pro-growth structural tax reform, the Compact for a Balanced Budget could permanently and structurally bridge future fiscal cliffs with a principled compromise that’s been poll-tested to get at least 38 states on board.
The Compact's Balanced Budget Amendment, in addition to fiscal soundness, allows for great flexibility when necessary: If a majority of state legislatures can be convinced that the federal government should borrow more money, the BBA allows for the federal government to finance truly justifiable wars and address genuine crises without easily exploited loopholes.
State legislatures will thus have a voice in whether new federal debt is incurred, for the same reason that the Constitution originally gave states a voice in the Senate: a distant centralized authority shouldn’t have a free hand in determining the future of every community in the nation. Indeed, the contemplated state debt approval process is more modest than the Constitution’s original design (before the Seventeenth Amendment provided for the direct election of senators). Instead of state control over half of the entire federal legislative power, the Compact for America targets state authority on the specific problem of unsustainable federal spending. It empowers the states only in direct proportion to Washington’s addiction to debt financing. If Washington kicks its debt habit, then the states will no longer have the power to intervene directly in the federal budget.
Moreover — and bear with me as I get into some technical economic weeds — among BBA proposals from the past couple of decades, only the Compact for America enables Keynesians, Monetarists, and Austrians to unite. That’s because, when ratified, the Compact’s BBA will set a hard constitutional debt limit that will erode in real value if inflation continues and state legislatures wisely throttle back congressional requests for more debt authority. Thus even Keynesians would support the kind of monetary stability long desired by Monetarists and Austrians in order to preserve flexibility in fiscal policy, without making ideological pre-judgments on what the budget should be spent on.
Only by working together to preserve the value of the dollar would Keynesians be certain to retain what amounts to a large revolving line of credit that could be paid down with surpluses during good times and tapped for stimulus spending during bad times. At the same time, because of the fiscal discipline imposed by a hard debt limit and external oversight of any request for future expansion of the limit, Keynesians would greatly minimize the risk of their good intentions being abused by Washington debt addicts seeking short term political gain — which is a huge risk under the status quo of federal borrowing “to infinity and beyond.”
While no proposal satisfies all constituencies – simply capping spending growth at GDP growth would be cleaner, for example – no other BBA idea holds the promise of creating a constitutional structure that will enable disparate schools of economic theory to find principled common ground on monetary policy.
With the states serving as an active board of directors for our wayward federal executive and legislative “CEOs” and the buck stopping at the president’s desk, the Compact for America would powerfully check and balance Washington’s debt addicts.
For more information, watch the overview briefing and read the model legislation.