Thursday, July 7, 2011

The Escape Clause

In light of today’s meeting between congressional leaders and the White House over the debt ceiling and entitlement cuts, two Republican senators have voiced strong support for a balanced budget amendment. Writing in the Wall Street Journal, Senators Olympia Snowe (R-ME) and Jim DeMint (R-SC) state that:
A constitutional amendment to balance the budget is imperative if we are to provide continuity of fiscal responsibility, and ensure we never return to the recklessness of the past and present. It's time Congress passed the amendment and gave the states—and "We the People"—their say.
The senators’ argument not only has wide support amongst the base and Republican politicians; all 47 GOP senators have endorsed such an amendment; but is sound and well articulated. The irresponsibility of continuous spending beyond our means is ruinous for the economic future of the United States. As Snowe and DeMint argue, “the only way to compel lawmakers to maintain their [fiscal] responsibility forever is a balanced budget amendment to the Constitution.”

However while the merits of such an amendment are clear to nearly all on the right and the more sensible on the left, there is at least one potential drawback that needs to be considered in the language of any acceptable proposal. While in nearly all instances there really is no reason to maintain an imbalanced budget, there are a few possible exceptions to the rule. Any balanced budget amendment must include an escape clause in order to prevent hamstringing future leaders (or daresay lead to a repeal of this amendment).

The most obvious exception is the case of major war or national catastrophe. It would be extremely difficult for any country to wage a large scale war, like WWI or WWII, without resorting to debt. Not only would such a restriction be impractical, but it would arguably be immoral to prevent our leaders from taking necessary measures to protect the country.

Concomitantly, there is an argument to be made that the costs of such a war (WWIII) should be spread over multiple years, if not multiple generations. After all, the sacrifices of those who fought in WWII were not just for the benefit of their generation but their progeny as well. It may be impossible for future generations to shoulder past sacrifices in terms of lives; however, it is possible to spread the financial costs. Utilization of debt is a prime tool to balance the costs of such conflicts over multiple years and generations.

Obviously, such instances are exceptionally rare and thus the use of an “escape clause” would only be warranted under extreme circumstances. Nevertheless, the point remains that debt or even a deficit is not always a bad thing. In certain other instances such as significant national projects (how to define the worthy ones is a tough issue) and severe economic decline, deficit spending might have beneficial uses. Just like the responsible use of debt by the individual – a homeowner who takes on a mortgage or a student who takes out loans to pay for college – there are instances where government debt is acceptable, even beneficial.

Debt isn’t intrinsically bad. The excessive abuse of it is the problem. Funding programs (and entitlements) that the government should not even be involved in is bad. The current mentality of spending more than we produce on a yearly basis even goes beyond the Keynesian economics it purports to be based on (Keynes argued for deficit spending during economic downturns with surpluses in upturns, not deficit spending every year). Such a mentality needs to be eradicated and the balanced budget amendment is a fabulous way to do so. Politicians should just be careful that in their haste to solve a serious problem they don’t create a new one by failing to consider the potential benefits of debt. It is a shame to throw the baby out with the bathwater.

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