The Balanced-Budget Amendment Threatens Americans’ Health Care, Social Security, and Jobs
The Balanced-Budget Amendment Threatens Americans’ Health Care, Social Security, and Jobs
In addition to worsening economic downturns, this amendment would increase the chances that congressional dysfunction could cause the United States to default on its obligations and plunge world financial markets into crisis.
With the House, Senate, and White House in Republican hands, GOP leaders have taken every opportunity to enact massive tax cuts for corporations and the wealthy as well as to pay for the tax cuts by cutting health care and other middle-class priorities. First, they sought to repeal the Affordable Care Act (ACA)—which would have eliminated health care for millions of Americans—while cutting taxes on high-earners, wealthy investors, and health care companies. When that effort stalled, the majority regrouped and passed even bigger tax cuts that the Congressional Budget Office (CBO) estimates will add nearly $1.9 trillion to the federal deficit over the next 10 years, even after taking into account potential growth effects. As Speaker of the House Paul Ryan (R-WI) and other lawmakers have explained, the Congressional majority ultimately plans to pay for the tax cuts by cutting “entitlements,” or in other words, Medicare, Medicaid, and Social Security.
These lawmakers understand that cutting these programs to pay for tax cuts for the wealthy is hugely unpopular. So, in order to obscure their true intentions, they are seeking to advance this agenda through a radical and dangerous means—by amending the U.S. Constitution. This week, the House of Representatives will consider H.J. Res. 2—a constitutional amendment sponsored by Rep. Bob Goodlatte (R-VA) and co-sponsored by 54 Republicans and one Democrat—requiring the federal budget to balance every year. Given the federal deficits that are projected in the coming years—which are substantially higher because of the tax cuts—the balanced-budget amendment would almost certainly result in drastic cuts to middle-class bedrocks, including Social Security, Medicare, and Medicaid, so long as the majority maintains its opposition to higher revenues.
Worse, a federal balanced-budget amendment could be calamitous for jobs and the economy because it would likely lead to economically damaging cutbacks at the very times when government spending is most needed. If these cutbacks were to occur during a downturn in the economy, it could turn rough patches into recessions and recessions into depressions. H.J. Res 2 would require supermajorities of three-fifths in both the House and Senate in order to raise the debt limit or run a deficit for a single year. In addition to worsening economic downturns, this would increase the chances that congressional dysfunction could cause the United States to default on its obligations and plunge world financial markets into crisis.
The balanced-budget amendment would force unthinkable spending cuts and threaten Social Security, Medicare, Medicaid, and other critical priorities
No program would be protected from these severe cuts, including bulwarks such as Social Security, Medicare, and Medicaid. Under the proposed amendment, Social Security and Medicare would not even be able to draw down their own trust funds to maintain benefits if the government, as a whole, were running a deficit.
What might this look like in practice? The proposed amendment would take effect in the fifth fiscal year after its ratification. For example, if it were enacted in FY 2018, it would take effect in FY 2023. That year, the CBO estimates that government revenues will fall 23 percent short of government outlays. This means that without tax increases, reaching a balanced budget would require slashing the government budget by nearly one-quarter. If done across the board, without exempting the military or any other function, that would slash Social Security by $308 billion, Medicare by $239 billion, and Medicaid by $114 billion in a single year alone.
And cuts would be even more drastic if the economy falls into a recession. Federal government revenues can be volatile during economic downturns. For example, in less than a year following the collapse of Lehman Brothers in September 2008, the federal government’s projected revenue for FY 2009 dropped by 15 percent—and this is not even counting the effect of tax cuts Congress passed in response to the economic crisis. If that kind of scenario repeats itself, Social Security benefits and other government spending would have to be cut by 35 percent, if done across the board. That would be devastating for those who rely on Social Security and other government programs and, as discussed below, potentially catastrophic for the economy.
With a constitutional balanced-budget requirement and many lawmakers pledging to oppose tax increases under any circumstances, there is no realistic scenario where Social Security, Medicare, and Medicaid escape unscathed.
Balanced-budget amendment would worsen recessions and make it much harder to get out of them
By requiring federal spending and revenue to match every year, the proposed constitutional amendment would make economic downturns more severe and make it harder to get out of them. When the economy weakens or goes into recession, the government collects less in income taxes. Meanwhile, several policies automatically kick in that cushion the effects of a recession on workers and families, from unemployment benefits to increased access to nutrition assistance. These automatic stabilizers are crucial in counteracting recessions. In addition, Congress has the ability to implement new fiscal policies when dramatic action is needed, such as when the American Recovery and Reinvestment Act of 2009 and other policies to address the Great Recession played a critical role in reversing the economy’s freefall. Forty-nine states are required to balance their operating budgets each year, making it difficult for states to enact countercyclical economic policy. These state balanced budget requirements increase the importance of maintaining automatic stabilizers and the ability to use discretionary fiscal policy at the federal level. Federal aid during the last recession was hugely important in reducing the number of layoffs of state and local employees, and being unable to provide this aid would likely lead to more teachers and other public servants losing their jobs during the next recession.
H.J. Res. 2 would threaten both automatic stabilizers and discretionary spending. The bill would require a three-fifths majority vote in each House for spending more than a given year’s revenue, making it much less likely that automatic stabilizers would be allowed to operate as designed or new countercyclical policies to be passed into law.
The proposed constitutional amendment would make recessions more frequent and worse by triggering austerity—automatic spending cuts or tax increases—at the worst possible time and taking away Congress’ ability to address economic crises. As Center on Budget and Policy Priorities budget expert Richard Kogan explains:
When the economy slows, federal revenues decline or grow more slowly and the cost of unemployment insurance and other social programs increases, causing deficits to rise. Rather than allowing the “automatic stabilizers” of lower tax collections and higher unemployment and other benefits to cushion a weak economy, the amendment would force policymakers to cut programs, raise taxes, or both. That would launch a damaging spiral of bad economic and fiscal policy: a weaker economy would lead to higher deficits, which would force policymakers to cut programs or raise taxes more, which would further weaken the economy.
As highlighted by Kogan, private-sector economic analysts estimated that, had a constitutional balanced-budget requirement been in effect early in the economic recovery, “the effect on the economy would be catastrophic.” The economy would have retrenched dramatically, and unemployment would have doubled from 9 percent to 18 percent, with 15 million more people out of work. The proposed balanced-budget amendment would have numerous unintended and potentially disastrous consequences. For example, it would make it illegal for the Federal Deposit Insurance Corporation (FDIC) to fulfill its role of protecting bank depositors from bank failures.
In numerous ways, the proposed constitutional amendment would threaten Americans’ jobs and economic security. It would be horribly misguided for Congress to engrave such misguided economic policy into the Constitution.
If Congress is concerned with deficits, it should repeal the reckless tax cuts it just passed
If the current Congress were genuinely concerned with future budget deficits, the first step it should take is to repeal the irresponsible tax cuts passed just more than three months ago. Those tax cuts—badly skewed toward the interests of wealthy Americans and corporations—were officially estimated by the CBO to drain $1.9 trillion in revenue over the next decade. The revenue loss could be much greater if, as tax experts predicted, well-heeled taxpayers exploit loopholes in the new law to avoid taxes and if state governments take actions to reduce federal taxes for their citizens. The Trump administration and Republican majority in Congress is also discussing piling on another round of top-heavy tax cuts that would cost approximately $770 billion over the next decade.
The fact that the same legislators are pushing even more deficit-increasing tax cuts at the same time as a balanced-budget amendment shows that the purpose of the amendment is to force maximal reductions to government spending, including Social Security, Medicare, and Medicaid.
The proposed amendment empowers extremists who would take the nation’s credit hostage for partisan demands
The proposed constitutional amendment the House is currently considering also requires a three-fifths majority in each chamber of Congress to raise the United States’ statutory debt limit. A supermajority requirement to raise the debt limit would mean that a minority in either chamber could refuse to raise the debt limit—holding the nation’s credit standing and financial markets hostage—to extract partisan demands.
It is important to note that the debt limit does not determine the federal government’s deficits or the national debt, as those are determined by the laws Congress passes governing spending and taxes. Raising the debt limit when needed merely authorizes the U.S. Department of the Treasury to issue debt to finance the obligations that Congress has enacted, thereby allowing the United States to make good on its legal commitments, including those to creditors, retirees, military personnel, veterans, federal contractors, and others. If the United States were to default on its obligations, it would cause widespread economic harm, throw financial markets into chaos, and permanently damage the country’s reputation and credit standing.
Currently, it essentially takes a majority of the House and three-fifths of the Senate (or a majority of the Senate under budget reconciliation procedures) to vote to raise the debt limit. Under these rules, Congress has already come dangerously close to allowing the nation to default—specifically in 2011, when lawmakers forced a debt limit crisis to extract concessions from President Barack Obama. The new restrictions H.J. Res. 2 imposes would increase the likelihood that a minority in either chamber could take the debt limit hostage with disastrous consequences.
For these reasons, the proposed constitutional amendment would threaten Americans’ retirement security, health care, and jobs. More responsible approaches include undoing the recent tax legislation and exploring practical improvements to our budget process. Members of Congress should reject this attempt to advance the conservative agenda of cutting Social Security, Medicare, and Medicaid through a radical, ill-considered, and permanent constitutional amendment.
Seth Hanlon is a senior fellow at the Center for American Progress. Alex Rowell is a policy analyst at the Center.
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Former Acting Vice President, Economy