The 'Twin-Deficit' Perspective
on the Balanced Budget Amendment

This is a brief synopsis. Please see also
The Federal Budget's Twin Deficits and the Balanced Budget Amendment
and the full-length
A Twin Deficit Perspective on the Federal Budget.

This perspective is basic for both the real problem of balancing the budget and for evaluating the Balanced Budget Amendment (BBA).

Congress projects a budget for 5 years ahead, based on ever-changing and unreliable economic forecasts of economic growth, interest rates and unemployment. These forecasts have huge impacts on projected tax receipts, interest costs and "safety-net" spending. By Congressional Budget Office (CBO) estimates even 1% more (or less) unemployment would affect the deficit by $74 billion in FY '98, by about $110 billion in 2002. As a result, disagreements over the economic assumptions underlying deficit estimates are a basic cause of budget wrangles.

Since responsibility without corresponding authority is a recipe for failure, it makes no sense to try to hold Congress constitutionally responsible for maintaining a continuously-zero Total Deficit.

To try to provide a more stable deficit target, the CBO estimates a "stabilized employment" projection of receipts, outlays and deficit, based on what these would be with an assumed constant unemployment rate of about 6%. This deficit (aka the "structural" deficit) is the real Budget-Policy Deficit, and should be the primary basis for congressional budget debates and public judgments of Congress's fiscal responsibility.

The difference between the Total Deficit and the Budget-Policy Deficit represents the traditional "automatic stabilizer" effect of the economy on the budget. Since, in recent years, the economy's growth and unemployment rates have themselves been largely controlled by Federal Reserve anti-inflation monetary policy, this deficit component could appropriately be called the Stabilization Deficit (or surplus).

Because Congress can largely control the Policy Deficit, a reasonable case could be made for using this as the basis for a BBA -- if there could be general agreement on the appropriate unemployment rate. But this is as subject to change as other budget definitions.

The CBO's near-6% unemployment basis for separating the Total Deficit into its Policy and Stabilization components has recently come into increasing question. During 10 of the 28 years before 1973 (when OPEC's high "oil tax" upset the world economy) we actually had less than 4% unemployment, and this is the policy-target rate legally mandated by the Humphrey/Hawkins "Full Employment and Balanced Growth Act of 1978." If we use this 4% as the basis for estimating the Budget-Policy Deficit, then, since 1973, the Stabilization Deficit -- over which Congress has no effective control -- has accounted for over 60% of the Total Deficit.

To reduce the Stabilization Deficit, should the Fed be required to keep unemployment below 4% -- and never to use high unemployment as the primary policy tool for combatting inflation? This would probably make more sense than the present BBA. But it also reveals how inappropriate it is to try to use the Constitution to dictate any specific congressional budget or economic policy.

Written: February 18, 1997
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