Balanced Budget Amendment

[AndyZ]

I've heard this term get thrown around a lot but haven't seen any discussions of it on here or in most of the news.  It seems like a good idea to me, and would certainly fix the problem of the perpetually escalating debt (though I think the ceiling would still have to be raised after it was passed in order to give it time to work) but I'd love for the more educated on the matter to enlighten me a little more on the perspectives of both sides and any possible drawbacks.

[Oniya]

If I remember correctly, the term refers to the idea that no budget can be passed unless we have the funding (GNP) to pay for it.  If we had/have to go to war, we'd have to pay off everything (material, personnel, etc.) within the year.  If there's a disaster (Katrina), we have to pay off everything within the year.  If we want to offer aid to one of our allies, we have to be able to pay it off within the year.

[Jude]

If it were passed, it would completely eliminate the possibility of any party using Keynesian Economic policy ever again.

I'm sure some people would consider that to be a good thing, mainly those who worship Milton Friedman as if his birth was the second coming of Jesus, but empirically they're simply incorrect.  Economic theorists haven't settled on any particular model, there seem to be advantages to all of them.

In short, I consider removing a valid governmental economic management strategy from the table to be an extremely poor decision.

And why is it necessary anyway?  Why tie our leader's hands?  It makes no sense.  If you don't want your leaders to deficit spend, don't vote for people who do deficit spending.

And if even those who decry it do it, that should tell you something about its vital importance as a tactic of a functioning government.

[Oniya]

Jude - you seem to have a bit more info on it than I do.  Was my interpretation correct?  I was working off of old news stories and not anything with textbook references.

[Callie Del Noire]

I find it interesting that when we are REASONABLE sound fically or the Budget isn't the issue of the moment, anyone who brings this 'Balanced Budget Amendment' is regarded as a crazy idiot but when it's budget issues on the news.. someone trots this out, knowing full well it won't work but that when the other side shoots it down it comes off as the bad guys.

It's almost as unworkable as the idea to eliminate ALL income tax and work off of a national sales tax only.

[Synecdoche17]

I've heard this term get thrown around a lot but haven't seen any discussions of it on here or in most of the news.  It seems like a good idea to me, and would certainly fix the problem of the perpetually escalating debt (though I think the ceiling would still have to be raised after it was passed in order to give it time to work) but I'd love for the more educated on the matter to enlighten me a little more on the perspectives of both sides and any possible drawbacks.

Imagine a person with $80,000 annual income and $150,000 debt. Is this person a) a financially unstable free-spender, b) a newly-minted lawyer with a great starting position at a mid-sized firm? Advocates of balanced budget amendments would have you believe it's always a), but even at the personal level it makes sense for some years' spending to radically exceed income, just as a law student might rack up many tens of thousands of dollars in debt annually but then pay it all back easily once s/he graduates. Government needs to be free to invest as necessary in the nation's future and safety.
Further, government's special role as a non-profit-seeking player in the economy means that the government can intervene to break depression cycles or other nasty economic phenomena in ways that the private sector is incapable of doing.
The only reason to back a balanced budget amendment is fear of higher taxes, but even that is a short-sighted fear, since history proves again and again that heavy government investing makes for a strong economy and, paradoxically, greater wealth for everyone.

[Caela]

Imagine a person with $80,000 annual income and $150,000 debt. Is this person a) a financially unstable free-spender, b) a newly-minted lawyer with a great starting position at a mid-sized firm? Advocates of balanced budget amendments would have you believe it's always a), but even at the personal level it makes sense for some years' spending to radically exceed income, just as a law student might rack up many tens of thousands of dollars in debt annually but then pay it all back easily once s/he graduates. Government needs to be free to invest as necessary in the nation's future and safety.
Further, government's special role as a non-profit-seeking player in the economy means that the government can intervene to break depression cycles or other nasty economic phenomena in ways that the private sector is incapable of doing.
The only reason to back a balanced budget amendment is fear of higher taxes, but even that is a short-sighted fear, since history proves again and again that heavy government investing makes for a strong economy and, paradoxically, greater wealth for everyone.

The problem with your comparison at the beginning is that the gov't isn't a person who wracked up 150,000$ in debt and is working to pay it off. It is more like a person who wracks up that much debt EVERY YEAR and then tells the bank it needs to give them more money so they don't default on the last 5 years worth of loans. Us being the bank.

You're right that we do need our gov't to invest in the future but we also need it not to be spending our children into the poor house. At some point the reins need to be pulled and we have got to say STOP. I think a balanced budget amendment would be too limiting, as stated some years you do have to spend more than comes in, but I also think some serious cuts need to be made before the gov't asks us to pony up more money as well. Politicians (of every stripe, no finger pointing at any one party here) seem to have a way of saying they'll cut spending  but when taxes go up those promises seem to go POOF and the spending just increases.

I'm willing to pay my share, even if it means my taxes go up a bit, but I want to see the cuts done FIRST, before they get more money to play with in Washington.

[Asuras]

but when taxes go up those promises seem to go POOF and the spending just increases.

Really?

[AndyZ]

Really?

What's the CBO's definition of revenues?  Can you provide the link where you got this?

[Oniya]

Found it:  http://www.economist.com/node/18928901

[AndyZ]

Nothing really on that link on any sort of correlation between the two.  However, I'm pretty sure that the listed numbers on there are about the money that the government is actually bringing in, not the numbers of how much they're taxing us.  (Taxable income elasticity and all that)

Since we got people on here who are good with finding these things, can someone search for a correlation between the tax rates and the amount of money the government is actually bringing in?  I've heard that they invert to some degree, which is proof of the Laffer curve, but I haven't really looked into it yet.

[Oniya]

I looked up info on the Laffer curve (which makes a certain amount of mathematical sense, but has only two calculable data points - namely 0% and 100% taxation), and then info on the federal budget until my head swam.  I'm sure there's something useful here: http://www.gpoaccess.gov/usbudget/index.html , but I think I'd need additional data to make a full-fledged correlation.

[Asuras]

The article in question (and Oniya found it rightly, and I apologize for not citing it immediately) is freaked out about something other than correlations. Namely that America is taxed less now and spends more now than it has in the last twenty years.

Nothing really on that link on any sort of correlation between the two.

Well, there is that chart. You're right, the article wasn't about the correlation of spending vs taxes. Nor need it to do so because:

It doesn't take a statistician to look at that chart and say "Hey, if taxes go up...spending doesn't really correlate." I'll put the data in Excel if you really want me to.

However, I'm pretty sure that the listed numbers on there are about the money that the government is actually bringing in, not the numbers of how much they're taxing us.  (Taxable income elasticity and all that)

I don't understand the distinction between "the money the government is actually bringing in" versus "the numbers of how much they're taxing us".

The chart I posted is "the cash dollars that the government takes in taxes" divided by "the cash dollars produced by the entire United States economy" (aka GDP).

[GloomCookie]

There is smoke coming out of my ears from all these talks of theories so I'm just going to throw my ideas out the door and hope I don't regret doing so.

When the government taxes people, they're doing so for the good of the (city/state/country).  Local taxes pay for police, firemen, utilities, etc.  When the government taxes people, they take the money and put it in their budget, allocating spending to cover the three basic needs every country's leaders need to focus on: Territorial Defense and Internal Stability.

Territorial Defense
Almost no one here would say we're on the defense here in the United States or Great Britain.  We're engaged in wars overseas and haven't had a foreign army on our soil in hundreds of years.  Yet we are on the defense.  Every single nation is on the defense when it comes to protecting their interests on the national stage.  For the US and UK, the primary focus is to protect their interests against foreign powers such as the People's Republic of China and global terrorism.

The military gets a huge budget as a result.  While sometimes it seems that we're just using the military to fund a war over oil or invading countries like Afghanistan, there are definite reasons for doing so.  The entire US and UK economies are dependent upon oil, because we need oil for vehicles to transport goods.  Not only that, but the military buys directly from many industries and provides funding for research into new weapons and armor, which can produce results that independent entrepreneurs can then adapt for their own needs to build a business.

In 2010, the US Government spent 685.1 Billion dollars on the combined forces of the military[1], of which, 140.1 billion was spent on procurement (such as obtaining weapons and ammunition) and 79.1 billion on research and development, as well as 23.9 billion on construction (such as bases).  That's a total of 243.1 billion dollars (35.5% of the total budget) going immediately out to civilian corporations.  Given that the US Government's total budget for 2010 (3,456 billion) [2], the military draws almost 20% of the total budget.  That's 7% of the budget immediately going back into the hands of civilians.  And that's just the military.

Internal Stability
As far as Internal Stability goes, the US is fairly stable for the most part.  Most cities contain crime fairly well, riots don't just spark for no reason, and for the most part civilians obey the majority of the laws and pay their taxes.  A nation must be secure militarily, economically, and socially in order to remain a viable power, and that's where the budget can come into play.  We've already discussed how the military, which can help establish order when it begins to break down, gets a plentiful share of the federal government, but like it's been mentioned already, the government functions as a non-competing member of the financial world.

when the banks began to go under, the majority of people correctly assumed it was because of bad business practices.  Many laws had been allowed to be ignored, and so banks began to operate by lumping loans with less than ideal credit ratings with others and dumping them into insured bundles within other banks.  The same situation happened in the 1920s when people borrowed money with no collateral, and then when the money came due, they couldn't pay, and it happened on a grand scale.  The same thing happened, and it just so happened that a rushed deal between Bank of America and Merrill Lynch helped make the situation decidedly worse.

For the most part, banks are in the business of lending to turn a profit.  More loans means more interest, which means greater profits.  The US Government insures deposits up to a certain amount, but for the most part, the banks are responsible for maintaining their books.  However, it's one thing to play dirty with money, and another to have the government pushing for the banks to begin making less than ideal loans to people in order to get them into houses, as the government did during the 90s.  It was believed that if the majority of Americans could own their own homes, it would boost the economy and lead to greater economic success in the future.

The point here is that while the government does have the power to manipulate the economy to help it expand, it must also be in a position to regulate the economy such that the disasters of the past don't become the problems of today.  That's why major banks now have US Treasury representatives on their boards, to oversee their operations to ensure they don't begin a downward spiral that will once again force the Government to step in.  The entire issue of bailing the banks out was because so much money was tied up within the banking system that a complete collapse would have plunged the US economy into the very depths of hell.

Expanding without Expanding
For the longest time, the US didn't operate according to how we view it today.  The government was responsible for printing money, but handled the economy by letting it roam free.  Businesses were allowed to grow unchecked, but the US was in a period of expansion until the 1900s.  As the country expanded, new opportunities arose, allowing new businesses to pop up and grow.  Because gold and silver were being discovered in the west, the Government was able to back dollars directly with their equivalency in gold and silver, which was standard practice at the time.

As the US took on its current continental shape, businesses which had begun to accumulate great wealth suddenly found themselves with a country that, rather than pushing frontiers, now had two major coastlines and was growing rapidly through the center.  This let business tycoons such as Rockefeller, Vanderbilt and others build up monopolies that threatened to crush the US economy in its vicelike grip.  Breaking up these monopolies became important to insure that men such as Rockefeller couldn't simply take control of the country by threatening to cut off the oil supply.

It was after the Great Depression that the idea of economic inflation became a reality.  Unlike before, when the US was growing, the US was now locked and no longer able to expand and grow the economy through traditional means.  This meant that in order to keep money from being locked away, the government would need to artificially expand the markets to allow wiggle room for new business to grow.  As a result, the US government allows a certain amount of inflation to creep in every year.  It was only during the 90s that inflation took off, and lead us to where we are now.



I'm going for a smoke, that post wound me up.

[AndyZ]

Well, there is that chart. You're right, the article wasn't about the correlation of spending vs taxes. Nor need it to do so because:

It doesn't take a statistician to look at that chart and say "Hey, if taxes go up...spending doesn't really correlate." I'll put the data in Excel if you really want me to.

Correlation is not causation.  Here's now Vekseid puts it:

Correlation does not imply causation 'Cum Hoc Ergo Propter Hoc', 'False Cause' - believing that because a occurs regularly with b, therefore a causes b. Includes Confusing Cause and Effect and Ignoring a Common Cause, but also pure coincidence - given enough sets of numbers, you will find one that matches what you are looking for.

I don't understand the distinction between "the money the government is actually bringing in" versus "the numbers of how much they're taxing us".

There's diminishing returns.  Just because you raise the tax rate doesn't mean that you'll bring in a proportionate amount of money.

An oversimplified example is that if you make a DVD and you'd ordinarily sell a million copies at $1 per DVD, if you raise the price to $100, it doesn't mean you would've actually made a hundred million dollars.  It's not exactly the same thing, but it's essential to understand this point: http://www.investopedia.com/university/economics/economics3.asp

In the same way, simply raising taxes doesn't cause the intake to go up at a linear rate, especially when the system is as riddled with loopholes as the American tax system is.  Even not taking into account the loopholes, the more money you remove from the system via taxes, the less money there is to go around, get invested, plug back into the system and so on, and next year there's less to be taxed.

I hope this explains a little better ^_^  I know I'm not very good at teaching.



Linna, there's an awful lot here and my ADD is being too naughty today to read the entire thing in detail.  Most of what I read, I've had no issue with, but I'm not entirely sure about this part:

The point here is that while the government does have the power to manipulate the economy to help it expand, it must also be in a position to regulate the economy such that the disasters of the past don't become the problems of today.  That's why major banks now have US Treasury representatives on their boards, to oversee their operations to ensure they don't begin a downward spiral that will once again force the Government to step in.  The entire issue of bailing the banks out was because so much money was tied up within the banking system that a complete collapse would have plunged the US economy into the very depths of hell.

I'm not really convinced that they have fixed this problem.

Back during the financial crisis of 2008, the American people were told that the largest banks in the United States were "too big to fail" and that was why it was necessary for the federal government to step in and bail them out.  The idea was that if several of our biggest banks collapsed at the same time the financial system would not be strong enough to keep things going and economic activity all across America would simply come to a standstill.  Congress was told that if the "too big to fail" banks did not receive bailouts that there would be chaos in the streets and this country would plunge into another Great Depression.  Since that time, however, essentially no efforts have been made to decentralize the U.S. banking system.  Instead, the "too big to fail" banks just keep getting larger and larger and larger.  Back in 2002, the top 10 banks controlled 55 percent of all U.S. banking assets.  Today, the top 10 banks control 77 percent of all U.S. banking assets.

Source: http://www.benzinga.com/11/07/1771942/too-big-to-fail-10-banks-own-77-percent-of-all-u-s-banking-assets

I'll admit that I don't fully understand much of what they're doing with the banks, but if it was too big to fail before, are we going in the right direction?  Aren't we just setting up for another inevitable necessary bailout?

[Asuras]

Correlation is not causation.

A while ago I posted a chart (nerd that I am) correlating the length of my hair with the US unemployment rate and found a very high correlation (0.80 or something). Obviously the length of my hair does not cause millions of Americans to go unemployed. So you're right: correlation is not causation.

But Caela said (paraphrased) that "taxes and spending go up together." That is a claim of a correlation. But my chart shows that that correlation does not actually exist.

So I'm saying that since they aren't correlated, "taxes and spending move randomly irrespective of each other." I'm arguing against any significant correlation or causation between the two.

There's diminishing returns.  Just because you raise the tax rate doesn't mean that you'll bring in a proportionate amount of money.

An oversimplified example is that if you make a DVD and you'd ordinarily sell a million copies at $1 per DVD, if you raise the price to $100, it doesn't mean you would've actually made a hundred million dollars.  It's not exactly the same thing, but it's essential to understand this point: http://www.investopedia.com/university/economics/economics3.asp

In the same way, simply raising taxes doesn't cause the intake to go up at a linear rate, especially when the system is as riddled with loopholes as the American tax system is.

The numbers in the charts I posted are federal revenues, after people paid to the federal government after deductions, loopholes, subsidies, whatever.

I think what you're talking about is the Laffer curve which says (correctly) that people will avoid taxes more when taxes are raised. They will, either by working less or by deductions.

In practice, every tax cut in the last thirty years has led to a reduction in revenue because cutting taxes doesn't lead to people working more or deducting less nearly as much. That means that we're on the short end of the Laffer curve and the government will get more money by raising taxes.

Even not taking into account the loopholes, the more money you remove from the system via taxes, the less money there is to go around, get invested, plug back into the system and so on, and next year there's less to be taxed.

The same is true if you cut spending - the less money the government injects into the economy, "the less money there is to go around, get invested, plug back into the system and so on, and next year there's less to be taxed."

[Oniya]

In practice, every tax cut in the last thirty years has led to a reduction in revenue because cutting taxes doesn't lead to people working more or deducting less nearly as much. That means that we're on the short end of the Laffer curve and the government will get more money by raising taxes.

The problem with this statement is that the only points where the Laffer curve is defined are 0% (when the government gets nothing, because there are no taxes) and 100% (when the government gets nothing because everyone is avoiding earning anything taxable).  The tax rate that gives a maximum return is not defined at all, and is very likely not at 50%, the way the curve's general depiction might lead people to believe.  We could just as easily be at the apex of the Laffer curve, in which case both cuts and increases would result in a decrease in revenue.

[Asuras]

The problem with this statement is that the only points where the Laffer curve is defined are 0% (when the government gets nothing, because there are no taxes) and 100% (when the government gets nothing because everyone is avoiding earning anything taxable).  The tax rate that gives a maximum return is not defined at all, and is very likely not at 50%, the way the curve's general depiction might lead people to believe.

You are the first person I have ever read or heard that the Laffer curve would suggest a 50% tax rate. All that the Laffer curve says is that "somewhere between 0 and 100% there is a maximum revenue" definitely not that it's 50%.

[Oniya]

Every depiction of the curve that I have seen shows this nicely symmetrical, roughly parabolic curve.  To someone who looks at the graph and doesn't read further into the theory, it's very suggestive of a maximum at or near 50%.  I make a point of reading what goes into a graph (masochistic that way ;) ) but the average person in the street probably doesn't.

I'm betting that most people you have discussed the Laffer curve with are more versed in economic theory than the general public.

It still doesn't follow that we are necessarily on the lower part of the curve and not at the apex.  In fact, since the apex is reflective of what the 'taxed' will put up with, the apex itself has a certain mobility, yes?

[Jude]

And in a global economy where it's easier to migrate to warmer 'tax climates' it's kind of difficult to rely on isolated economic models like that anyway.  You need a multidimensional approach if you want to consider the economic conditions we actually live in.

[Vekseid]

And in a global economy where it's easier to migrate to warmer 'tax climates' it's kind of difficult to rely on isolated economic models like that anyway.  You need a multidimensional approach if you want to consider the economic conditions we actually live in.

In order for this argument to hold, their income has to either be derived from outside of the United States, or from their own talents as individuals. Bill Gates, Warren Buffet, Larry Ellison, the Koch Brothers, etc. can all flee the country, but their money is still made in the United States for the most part.

If their money is made outside of the US, that country has a right to it before the US does.

If that money comes from their own personal talent, then the tax revenue is only lost if no one else is capable of producing the lost economic output. It is very likely, in many cases, that their 'going Galt' will actually increase economic activity and revenue, for all of the glass ceilings they personally impose while they remain here.  It is not at all likely that anyone, anywhere, is actually worth a nine figure income.

I call it 'flight of the douchebags' for a reason. Look at the richest 100 people in America. Nine times out of ten, the ones with leanings who would 'flee to a tax haven' are not the sorts of people who do this country credit.

[Revolverman]

going what?

[Jude]

That may be true for individuals to some extent (though it discounts the loss of their money being spent in our economy), but what about corporations?  If Apple leaves for Canada because corporate taxes are too high here, you don't think that would hurt America?

[Vekseid]

That may be true for individuals to some extent (though it discounts the loss of their money being spent in our economy), but what about corporations?  If Apple leaves for Canada because corporate taxes are too high here, you don't think that would hurt America?

It doesn't discount it. It aggressively states that they cannot efficiently spend the money they earn. This is an empirical fact - banks and corporations are sitting on a combined three trillion dollar - and growing - cash stockpile. That money could be used to put thirty million Americans to work, indefinitely. It isn't.

These actions are not going to be taken in a void. It is rather patently obvious to anyone familiar with the situation that this is going to have to include corporate tax reform. The exact same principle holds - the money they make in the United States is still potentially subject to taxation no matter where they base themselves.

And, seriously, the loophole that existed during the last 90% tax bracket will still exist. It's there for a reason, and was a major part of the postwar boom. You can let the government take your money, or you can reinvest it, if you think you can do a better job than the government can.

[Oniya]

going what?

http://en.wikipedia.org/wiki/John_Galt#Cultural_significance

(I had to look it up, too.)