Photo credit: MIT Sloan

Simon Johnson, former IMF chief economist and current professor at the MIT Sloan School of Management

We have stared hard into the abyss of a national default, and the close call with financial Armageddon is starting to make a balanced-budget amendment look good.

A stringent restriction on public borrowing, if properly crafted, offers the hope for more fiscal responsibility, less wasteful spending and a slightly less terrifying budgetary process. Yet while a well-crafted amendment looks a little better, there are enormous challenges in creating a sensible measure that balances fiscal restraint with the ability to adapt to new circumstances.

Proponents argue that a balanced budget amendment would mandate fiscal responsibility and help balance state/federal expenditures. Of course, any such amendment would amount to little more than a promise by Congress, as they likely would “be able to waive it and claim a national emergency due to “war” or some other hardship and pass another budget with a huge budget deficit,” as Zbigniew Mazurak writes. This is almost certain to occur, as a constitutional limit on spending in the range of the current proposals (18% of GDP in the McConnell amendment, 20% in the Shelby-Udall version) would force crippling, sweeping spending cuts to vital social programs to meet the requirement, a move that would likely be politically untenable. The recent debt ceiling fiasco should be an indication that Congress would most likely just waive the rule in short increments as agreeing on a deal to actually reduce spending from its current level (about 27% of GDP) to such a limit would be nearly impossible.

Even if Congress does manage to keep its pledge, the idea of a mandatory balanced budget in all circumstances is undesirable. Like most households, the federal government occasionally needs to borrow money to make investments for the future, in the same way people take out loans to attend college or purchase a house. Deficit spending can be a vital economic tool during recessions. Although the macroeconomic data on this is ambiguous and there exist plenty of counter-examples in which deficit spending didn’t work, well-constructed spending policies that target proper sectors of the economy can only help in desperate economic times, a point that Glaeser admits should be taken into account in a balanced budget amendment but one that calls into question the point of such an amendment in the first place.

A federal balanced budget amendment would also not provide much financial help for states, many of which are reliant on federal money that would be curbed by such an amendment. Glaeser also cites state balanced budget amendments as evidence in support, claiming “States and localities saddled with balanced-budget rules are relatively parsimonious and spend a fair amount of time debating even relatively modest public investments.” It’s worth noting that every state except Vermont has a balanced budget amendment of some sort, and yet 24 have projected budget shortfalls for FY 2013. This is in part because, as Adam Lerrick, economics professor at Carnegie Mellon University, describes, states can and do get around balanced budget requirements by not recognizing capital expenditures and pension liabilities as budget items. The federal government would likely employ the same tricks, perhaps also altering its GDP formula, which as Simon Johnson, former chief economist at the International Monetary Fund, explains, “is not a legal concept but an economic measure, the details of which change all the time, subject to the prevailing view of best practice among statisticians.”

All in all, current balanced budget amendment proposals would either be too restrictive on fiscal policymaking or virtually unenforceable. Glaeser’s suggestion to include flexibility in case of recession or war is well taken. But such a “loophole” would only create continuous debt ceiling-esque political showdowns and crisis situations during budget negotiations every time Congress simply decides to waive the amendment (or utilize some other loophole) because a deal to reduce spending couldn’t be reached.