The Balanced Budget Trap

Popular wisdom has it that the Contract with America is defunct, killed by the excesses of Newt Gingrich and his extremist band of Republican freshmen. The Contract is certainly dead as a campaign manifesto, but its single most damaging provision is lethally alive. The balanced budget amendment failed the Senate by only one vote in March 1995, and two votes in June 1996. Earlier, in 1995, it passed easily in the House of Representatives (300 to 116). A return engagement is likely after the November election.

Even if Democrats pick up seats, the amendment could pass, because many Democratic candidates have felt the need to embrace budget balance as "cover" to insulate themselves from the tax-and-spend label. In January, we could well encounter a Congress more Democratic—yet more likely to approve an amendment crippling to an activist view of government. Normally, the ratification process, which requires 38 states to concur, would slow any ill-considered amendment. However, in the case of the balanced budget amendment, a large majority of state legislatures are poised for a quick ratification without even a hearing.

The amendment would fundamentally alter the rules of fiscal policymaking. Federal revenues and expenditures would have to be balanced each fiscal year. Any tax increase would require a majority vote of the full membership, not an ordinary quorum, in both houses. Budget reductions, by contrast, could be passed with traditional majority votes. In essence, the amendment embeds a "starve the beast" ideology in the Constitution and provides a continuous impetus for spending cuts.

Short of an overwhelming consensus (three-fifths of all members, both houses) to suspend the amendment's provisions, deficit spending would be prohibited whether the economy is growing, stagnating, or in serious recession. The federal fiscal role as "automatic stabilizer" would end, along with countercyclical aid, leaving many of those hurt by recession not only out of a job but out of assistance.

In economic downturns, revenues fall and demands for transfer payments go up. This requires a temporary increase in deficit spending. But with constitutionally mandated budget balance, the fiscal stabilizer role goes into reverse. Faced with revenue shortfalls in a weak economy, the federal government must raise taxes or cut spending to balance its books—both of which serve to deepen rather than moderate recessions.

The next time around, liberals may make a last fiscal stand in opposition to the amendment. But that would be too narrow a stance. For if absolute budget balance is bad constitutional policy, it is bad fiscal policy, too. And by attempting to argue that ordinary budget balance is virtuous while a constitutional amendment is excessive, well-intentioned Democrats only lend credence to both.




It is tempting to see the balanced budget amendment simply as a Republican ploy to continue the relentless ratcheting back of government. In a sense, this is the continuing legacy of Reaganomics, a cycle in which conservatives cut taxes, increase defense spending, incur chronic deficits, rack up debt—and then argue that government spending is out of control and must be stopped with constitutional limits. This formula is indeed deadly for traditional Democratic programmatic activism. However, no fewer than 14 Democratic Senators voted for the amendment last June, including 3 of the Senate's more liberal members, Joseph Biden, Tom Harkin, and Carol Moseley-Braun. Another liberal Democrat voting in favor, retiring Senator Paul Simon, is one of the chief architects of the current version, which he crafted with Republican Senators Orrin Hatch, Bob Dole, and Dennis DeConcini. A few liberals, notably Simon, think budget balance would compel tax increases, as people appreciated that valued programs were on the chopping block. This view, while at least principled rather than expedient, is both politically shortsighted and fiscally excessive. Without Democratic support, the amendment would be a nonstarter.

During this election cycle, numerous Democratic candidates have jumped on the balance bandwagon. The Senate is the crucial arena, given the wide differential in the House amendment vote. Democratic Senate candidates considered generally liberal who now support the amendment include former Maine Governor Joe Brennan and New Jersey Congressman Robert Torricelli. Even labor-backed congressional candidates contesting freshman Republicans have been advised: "Don't challenge balance." This may be smart tactical advice in the face of polls indicating overwhelming popular support for balanced budgets. However, the same voters don't want cuts in cherished programs. In the long term the cost of this tactic is devastating. Critically important distinctions between deficit reduction strategies, balanced budgets, and the permanent elimination of deficit spending are being lost. Democrats, including many liberals, are undermining the basis of their philosophy of governance.

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Unfortunately, chief among these Democrats is their president. Last spring, Clinton agreed to a seven-, now six-, year path to balancing the federal budget by 2002. At the time, Clinton's reversal startled his closest aides, including Chief of Staff Leon Panetta and Office of Management and Budget Director Alice Rivlin, both deficit hawks. In the wake of Dick Morris's hasty departure, press reports confirmed that the sometime Republican Morris was the key influence urging budget balance on Clinton, who was already angry that voters gave him no credit for reducing the deficit.

Clinton does oppose (quietly) the constitutional amendment, but has failed to articulate why he supports legislative but not constitutional balance. With Clinton's support for balance, the distinction eludes most voters and the logic becomes: If balancing the budget is "good" (as both parties apparently agree) and politicians have trouble delivering on the promise, then why not lock the requirement into the Constitution?

In fact, absolute budget balance as a fiscal principle is bad, and a constitutional requirement for balance is rigidly worse. The case for budget balance is built in part on two popular but misleading analogies—state governments and household budgets. The structure of state finance is fundamentally different from that of the federal government, and even those states with stringent balancing requirements are able to borrow for a variety of purposes. The household analogy is even sillier. Few of us buy homes or send children to college out of our annual operating budgets.

The arguments against constitutional budget balance boil down to these: First, as a matter of macroeconomics, precise balance would be a perverse cure for America's relatively mild deficit and debt problem. Secondly, the amendment, in the present fiscal context, would be devastating to state and local finance. Third, it would bring the courts into day-to-day budgetary decisions, leading to an infinite regress of necessary deceptions, judicial prohibitions, and countermoves. The text "prohibits the Federal judiciary from hearing cases or pronouncing opinions on any cases or controversies arising under this joint resolution, except as authorized by subsequent legislation," but it is hard to imagine that subterfuges would not be litigated. The provisions governing how an emergency suspension would operate are poorly drafted, and would invite further litigation. And finally, as a matter of politics, the amendment would complete the paralysis of activist government, the public philosophy that has distinguished modern liberals from conservatives.



Advocates for the amendment contend that the elimination of deficits will broadly increase prosperity and remove a debt burden that menaces future generations. The economic logic, supposedly, is this: Eliminating the deficit will increase the national saving rate and will lower interest costs, raising rates of investment and productivity—and hence living standards. A key concept here is "crowding out." When government borrows money to finance deficits, it taps private savings and competes for capital that could be used more productively in the private sector. Hence, if the deficit is brought down, interest rates will come down, capital will be freed for investment, and the economy will grow faster. What's wrong with this argument?

For one thing, within broad limits there is no precise relationship between deficits, interest rates, savings, investment, and growth. Private saving can finance productive investment, but so can public borrowing. The United States came out of World War II with a ratio of debt to gross domestic product more than double the current one—and 20 years of unprecedented growth followed. The worst interest rate crisis of the postwar era, in the late 1970s, occurred when the debt-to-GDP ratio was near a postwar low. In the recent period of relatively high debt, since 1990, interest rates have steadily fallen. There is simply no precise relationship between economic growth and deficit spending, or between deficit spending and interest rates, nor is there agreement among economists on the appropriate ratio of debt to GDP.

At some extreme, year after year of deficits would be fiscally unsustainable. The debt trebled in the 1980s because the federal budget deficit was growing faster than the economy for several consecutive years. The consequence was an excessive growth in the ratio of debt to GDP, from under 30 percent when Jimmy Carter left office to over 50 percent in George Bush's last year. Moreover, most of that debt went to finance current public spending, not public investment.

But to remedy this trend, we don't need to bring the deficit to zero. We need only keep the annual increment added to the national debt—the amount added by the annual deficit—below the rate of real economic growth. For example, if the economy grows at 3 percent a year, and the deficit is 2 percent of GDP, then the all-important debt-to-GDP ratio declines by one point every year. The difference between absolute budget balance and a deficit of 2 percent of GDP is about $160 billion a year of public outlay. It is the difference between massive cuts in public spending and the capacity to address national problems with public dollars. It is the difference between a liberal and a conservative view of fiscal policy. But with both parties committed to budget balance, and neither prepared to back tax increases, that difference collapses.

Ironically, the Clinton administration to date has followed the course of getting deficits below the rate of economic growth, but not getting them all the way to zero. The Congressional Budget Office projects that the current-year deficit will drop to its lowest level since the Carter administration, 1.9 percent of GDP, or well below the trend rate of economic growth. This course has been sufficient to allow the Federal Reserve Board to keep interest rates low.

Arguments over investment lie at the heart of our current economic and budget battles. The adjective "productive" usually precedes private investment, while the adjective "wasteful" often modifies public investment. Robert Eisner, past president of the American Economic Association, observes that "Most non-ideologues" recognize public investment "as at least an equal contributor to productivity and hence growth." If you really care about the next generation, Eisner says, "Cutting expenditures for children, for Head Start, primary and secondary education, loans to college students, health, basic research, our physical infrastructure and protection of our natural resources and environment of land, water and air, are precisely what will hurt our future."



Advocates have a ready answer to this caution. They point to the states, most of which have constitutional requirements to balance their budgets, as evidence that an amendment is both feasible and necessary. But most states distinguish between annual operating (general fund) expenditures and capital budgets that finance major public works through debt financing. Capital budgets generally are excluded from state balancing requirements. The federal government has no capital budget. The balanced budget amendment would force future public investment to be paid for with annual operating funds, on a pay-as-you-go basis. Few economists, even conservative ones, object to debt financing at the state level. But there is no companion proposal for a federal capital budget.

In addition to capital budgets, states have set up numerous "off-budget" or special funds. Originally, such funds were financed by user fees earmarked for specific purposes. The growth in the last two decades of special funds has been tremendous, aided in part by liberal judicial interpretation of earmarking, and has reduced state dependence on general funds. Nationwide, the portion of state general fund spending in 1993 was 48 percent of all state spending, ranging from a low of 21 percent (Wyoming) to a high of 74 percent (Hawaii). California, following a national pattern, saw special fund spending rise from 13 percent of total state spending in fiscal year 1983-84 to 28 percent in fiscal year 1994-5. New York's levels are even higher: In the last decade, special fund expenditures in that state grew 154 percent and now constitute 42 percent of total state spending.

Some special funds can incur debt. During the 1980s, Ohio borrowed over $2 billion dollars from its Unemployment Trust Fund (now paid back with interest), causing it to run a deficit every year between 1980 and 1987. According to Frank Mauro, director of the Fiscal Policy Institute, the state of New York routinely borrows from special funds in surplus to make ends meet, This year, for example, the state borrowed $525 million from the Medical Malpractice Reserve fund.

State balancing requirements vary widely in general, and may or may not apply to special funds. But, at the very least, capital budgets and special funds give states more flexibility than constitutional provisions suggest, and infinitely greater flexibility than the balanced budget amendment would give to the federal government. Even those states with fairly strict constitutional provisions have run deficits, sometimes for several years in a row.

Richard Briffault, a professor at Columbia University Law School, observes that a significant source of state fiscal discipline lies not in legal requirements or constitutional provisions but in the bond market. State credit ratings "reflect investors' confidence in the ability of a state to pay its debts," Briffault notes, and hence limit a state's effective borrowing capacity.

Even in states with strict provisions or a political culture that strongly supports budget balance, a plethora of accounting gimmicks have been devised to reconcile flexibility with nominal budget balance. These include optimistic economic forecasts, manipulation of fiscal periods, delayed payments to creditors (including local government), underfunding public employee pension funds, backdoor financing such as sale and leaseback schemes, refunding outstanding bonds, and interfund transfers.

In a paper for the Twentieth Century Fund, "Balancing Acts: The Reality Behind State Balanced Budget Requirements," Briffault found these "fiscal slights of hand" were more likely to occur during recessions, "as states struggled to deal with the fiscal consequences of an unexpected economic downturn without drastically altering their spending programs or their tax structures." The federal government is likely to be at least as "creative." We have only to remember David Stockman's "rosy scenarios" (fictional economic growth projections) to imagine the possibilities, but this kind of creativity tends to feed voter distrust and cynicism.

One reason why states have averted devastating program cuts during recessions is, of course, federal aid. In non-recessionary times, states receive anywhere from one-fourth to one-third of their revenues from the federal government. When the economy is in recession, various federal entitlement programs, unemployment insurance, AFDC (until its recent repeal), food stamps, and Medicaid automatically increase monies as caseloads rise. Jean Ross, executive director of the California Budget Project, reports that federal dollars as a percentage of total state spending increased from 29.5 percent in fiscal year 1990-91 to 38 percent in 1993-1994.

In the state of Washington, unemployment reached 7.8 percent in the 1993 recession, well above the 7.2 percent national peak. According to Jim McIntire, director of the Fiscal Policy Center at the University of Washington, "Between 1991 and 1993, federal income assistance for AFDC, SSI, and Food Stamps in Washington rose by 25 percent, or $142.4 million dollars, and 70 percent faster than the rate of total general fund spending." After the recession, federal aid to the state of Washington returned to a rate comparable with, or below, state spending growth. Josie LaPlante, of Maine's Muskie Institute, describes Maine's recession as "massive and tenacious." Between 1989 and 1992, federal expenditures grew by 58 percent. Maine's tax revenues, LaPlante reports, "bore a strong resemblance to a bungee cord," expanding rapidly during "good times" and contracting rapidly during bad times.

Under the balanced budget amendment, additional federal assistance to states would not be automatically available but would depend on either a national tax increase, requiring a roll call vote of a majority of all members in each house, or cuts in non-safety net programs. While the override provisions are murky, as McIntire and others point out, recessions are increasingly regional. Drumming up supermajority support for deficit spending from politicians whose states are unaffected is likely to be more difficult than if the nation as a whole were affected. LaPlante emphasizes that Maine received increased federal money before policymakers even knew the regional economy was in a long-term trough.



If the amendment is draconian, even legislative balance by 2002 will be austere in the extreme. Coupled with competition by both parties to legislate additional tax cuts, balance by 2002 will require spending reductions that range from $500 billion to well over $1 trillion, depending upon whose plan is considered. Beyond 2002, the pressure for discretionary spending cuts will continue, given increased costs in Medicare and Social Security. With a constitutional amendment, the built-in deterrent to raising revenue would only deepen spending cuts.

The Balanced Budget Act of 1996, which Clinton vetoed, called for roughly $896 billion in spending reductions (cuts in entitlement programs plus discretionary spending) over seven years, a compromise between Senate plans and a House plan that called for even deeper cuts. Candidate Dole's election-year balanced budget plan would cost over $1 trillion in spending cuts, according to both the liberal Center on Budget and Policy Priorities and the conservative Concord Coalition.

Virtually all congressional paths to balance are constrained by the same realities. First, over half the federal budget remains "off the table," immune from budget cuts, including defense spending, Social Security, and interest on the debt. Last year, both the Clinton administration and congressional Republicans sought increases in the military budget; this year, the Republicans have added $13 billion to Clinton's request, including a resurrected Star Wars program. [See Paget, "Can't Touch This? The Pentagon's Budget Fortess," TAP, Fall 1995.]

With so much of the budget protected, spending cuts have to be taken from the remaining (discretionary) portion of the budget. (Dole has added Medicaid, Medicare, and veterans' benefits to the list of protected programs, which leaves even less of the budget to cut.) The Center on Policy and Budget Priorities estimated that roughly 30 percent of nondefense discretionary spending ($225 billion in fiscal year 1995) flowed to the states. As a practical matter, some discretionary programs-for example, the IRS or FBI-receive greater protection than others. Therefore, cuts will not be evenly distributed, and some programs will receive very large cuts.

Second, cuts are heavily backloaded: That is, the largest cuts are targeted for the years closest to 2002. Neither party wants the enormity of the cuts needed to achieve a balanced budget in neon lights. This practice means that statistics depicting cuts in the next year or two, as well as seven-year averages, are totally misleading. Spending reductions in the years 2001 and 2002 are estimated to be 7 or 8 times greater than the effects in the first and second years.

Thus, when you combine the protected portion of the federal budget, the practice of backloading, and the retention of 2002 as the target year, the effects, especially on states, become quite dramatic. Safety net and other programs important to states, such as Medicare, Medicaid, and other health programs, income support, and education, would have accounted for a full 84 percent of the reductions in federal spending in the final year, 2002-stunning evidence that the cuts fall disproportionately on programs serving the poor or needy.

While voters loosely support the broad principle of budget balance, few have much appreciation of the relationship between federal and state budgets. In many states, federal assistance is the largest single source of revenue in the state budget. Some state programs receive little assistance from state coffers and are almost totally dependent on federal funding. This dependency is particularly true for employment and job training programs, a fact that takes on added significance with the signing of the new welfare bill and the push to put people to work. Most states similarly rely heavily on federal money for children's services. A majority of California funds (54.3 percent) spent on children's aid, including foster care, are federal. Former Deputy Commissioner of Revenue Richard Levin and the former budget director of Ohio, Lee Walker, found 12 departments or agencies in Ohio that were 40 percent or more dependent on federal funds.

The Twentieth Century Fund, as part of its balanced budget debate project, commissioned a series of papers to explore more precisely the fiscal effects of federal government balancing plans on states. Despite variations in the fiscal health of individual states, a recurrent theme in these papers is that most states will be hard pressed to finance their own priorities in the coming decade, let alone absorb massive cuts in federal assistance. Most states are facing excruciating choices and trade-offs among criminal justice, education, and health and human service needs. At the same time, antitax sentiment among voters has risen steadily, significantly limiting states' revenue-raising options.

Even those states that are well off at the moment, with healthy economies and substantial "rainy day" funds, would have enormous difficulty coping with billions in federal cuts. Ohio, for example, has a growing economy. Legislators have put aside a $1 billion "rainy day" fund, and this year's candidates are all talking about cutting taxes. Sounds good? According to Richard Levin, if these federal cuts had taken place the whole reserve would have been wiped out in five or six months.

Several other patterns that will severely limit states' capacity to respond to federal cutbacks emerged from the Twentieth Century Fund's papers. These include antiquated revenue systems, constitutional or statutory tax and spending limitations, and a depleted supply of fiscal strategies to cope with big losses.

Many states have revenue systems that were designed to capture proceeds from an industrially based, not service, economy, and frequently fail to generate enough annual revenue to cover current costs. Andy Reschovsky, an economist at the University of Wisconsin, using conservative assumptions, estimated that Wisconsin's structural deficit would be $1.5 billion by 2005. When spending cuts from the vetoed federal budget bill were added to this gap, the number reached $2.5 billion.

An increasing number of states face voter-initiated constraints on raising revenue and spending state money. California leads the way in sheer number of constitutional mandates, beginning with Proposition 13, which limited local property taxes, required supermajority votes on taxes, and increased local government's dependence on Sacramento. This 1978 amendment was followed in 1979 by the Gann limit, which limited both local and state expenditures. Proposition 62 in 1986 limited local tax initiatives. Proposition 98, passed in 1988, established a floor below which K-14 education funding could not fall and assured a portion of new revenues. Other recent initiatives, such as "three strikes and you're out," mandate spending. The three-strikes initiative will require financing 15 new prisons in the next decade.

Since 1978, voters have passed some form of tax or spending limitations in 20 states. Jim McIntire estimates that by 2002, Washington's spending limit will result in a $945 million gap between current service spending and permissible limits. However, when cuts from the Balanced Budget Act of 1996 are added, the figure rises to $4.9 billion.

States have responded to current fiscal pressures by using all the gimmicks (and more) delineated by Richard Briffault. Perhaps the most important strategy has been the practice of shifting costs either upward, to the federal government, or downward, to local government. California, for instance, has used money from the counties to fulfill its obligations to education under Proposition 98, and most county executives will tell you that safety net programs as well as other basic services, such as juvenile justice, lie in tatters. A few years ago, only a federal bailout saved Los Angeles County from bankruptcy. Thus, many states have already exhausted options that might be used to absorb permanent reductions in federal spending.



A balanced budget amendment would also intensify the current pressure to replace entitlement programs with block grants, since it would be difficult to achieve balance with open-ended spending commitments. The major welfare program, AFDC, is no longer an entitlement program, as it has been for 60 years. In the short term, some states will receive a "windfall," since their block grant is calculated based on past federal AFDC aid during years when the economy was either still in a recession or just coming out of one. At the same time, states will be permitted to use some of the money, up to 25 percent, for other, unspecified, purposes. To put it another way, states can cut welfare expenditures by an additional 25 percent without penalty. But when the next recession hits, states—not the federal government—will be exclusively responsible for financing services for those in need.

The welfare money at stake is paltry compared with the Medicaid program, which Republicans also have proposed to turn over to the states. In most states' budgets, Medicaid dollars constitute the largest percentage of federal funds, typically 40 to 50 percent of all federal monies flowing directly to state budgets.

Currently, the Medicaid program is structured to induce states to make generous contributions. The federal government matches every dollar spent on Medicaid according to a formula that takes into account state poverty levels and other demographic factors. Since every dollar spent by a state leverages federal money, it typically costs a state less than 50 cents on the dollar. If Medicaid is block granted, this relationship ends, along with states' incentives to allocate funds to the program. Any increase in Medicaid requires the entire dollar, which in budgetary terms means that some other state program doesn't get it.

Most Medicaid recipients are either blind, disabled, or low-income elderly, not welfare mothers, as commonly perceived, and the largest single category of Medicaid expenditures is the reimbursement of nursing home costs. To illustrate the magnitude of reductions in the vetoed Balanced Budget Act, Levin and Walker sorted Medicaid recipients by category: adults, children, blind and disabled, and aged. "The federal aid cut to Ohio in the human services area is the rough equivalent of eliminating Medicaid for all 793,000 children and all 349,000 low-income adults who are not aged, blind or disabled," they calculate.

Levin and Walker do not suggest that these are the choices state policymakers would actually make; the data serve, rather, as illustrations conveying just how huge the impact on one state could be. One's imagination doesn't have to stretch very far to predict increased competition among various Medicaid beneficiaries, including nursing home providers. Overall, Levin and Walker estimated that the "transition to a balanced federal budget will cause a 27 percent reduction in federal aid to Ohio's state and local government." They estimate the cost at $2.4 billion.

The political logic of budget making generally means that when safety net programs are pitted against education or criminal justice needs, safety net programs lose. This is particularly true when fiscal pressures squeeze programs with broader or more powerful constituencies than unemployed or low-income individuals. During the 1990s, state after state made reductions in AFDC payments, or ended general assistance altogether.



While the argument over debt is as old as the Republic itself, and the idea of a balanced budget amendment is several decades old, few observers before the 104th Congress believed that such a rigid measure would ever stand a chance of success. We have reached a moment when a balanced budget amendment is broadly popular, despite program consequences that would be highly unpopular. The factors that have converged to intensify the usual tension between policy and politics include these: the excessive levels of debt incurred during the Reagan years; the ideological push to shrink, if not dismantle, many government programs; popular disgust with special interest politics; the emergence of Perot, the Concord Coalition, and budget balance as symbols of virtuous stewardship; a group of state governors eager to gain more control and loath to admit there isn't any "devolution" they can't handle; and tactical dances by Democrats fearful of the "tax and spend" label.

The recent political history of the amendment suggests just how fragile is the opposition. In early 1995, the Clinton administration did work (belatedly) to ensure a "no" vote. Several senators, including Senate Minority Leader Tom Daschle, Byron Dorgan, and Kent Conrad, changed their previous "yes" votes to "no" in the 31-hour cliffhanger Senate debate in March 1995, when the amendment died by one vote. But their stated opposition was based on the fact that the amendment didn't protect Social Security. The Social Security program, currently in surplus, is part of the budget, and its current revenue flow actually offsets the overall deficit by about $60 billion a year. As a matter of fiscal policy, segregating Social Security would therefore require an additional $60 billion a year of additional budget cuts to achieve a balanced budget.

Opinion polls show that support for a balanced budget amendment drops from 80 percent to 30 percent if Social Security isn't protected. If Social Security were protected, all three swing senators indicated they would support a balanced budget amendment, and even drafted and introduced a separate version to reflect their position. Just before the last vote, in June 1996, rumors were rife that the Republicans would agree to protecting Social Security, thereby securing these three votes, and possibly those of Senators Dianne Feinstein, Wendell Ford, and Ernest Hollings. Dorgan's press aide says negotiations never got serious. Dole wanted a second vote before he left the Senate, even though he knew he couldn't win it, to use as a club against Democrats in November.

The basis for the Democratic senators' opposition, however, is hardly rock solid. Depending upon the composition of the Senate in the next Congress, their opposition could easily become a parable about the perils of political "cover." Political cover is a kind of fig leaf that produces a voting record consonant with voter preferences, but that doesn't necessarily reflect the politician's "real" position. An aide to Daschle described the obsession with cover as building a coffin within a coffin.

Elizabeth Drew, in her two books about Congress and the Clinton administration, On the Edge and Showdown, chronicles Clinton's capitulation from deficit reduction strategies to Republican demands for legislative balance. The great irony, of course, is that the voters soon came to see Gingrich's budget plans as extreme. Every opinion poll that asked questions regarding balance if it meant cuts in specific programs showed a precipitous drop in support. These findings suggest there is in fact room for education and leadership.



Progressives and Democrats should stop pandering to the conceit that budget balance equals virtue. This tactical retreat only reinforces a mistaken consensus that then becomes politically irresistible. The public needs to know precisely what it would cost to balance by 2002. Opponents of a constitutional amendment should begin planning hearings at the state level to make clear the impact. Similarly, block grant proposals to turn safety net programs over to the states—the corollary to balance—need to be vigorously fought. Democrats should be thoroughly forewarned, since Speaker Gingrich has been explicit about his objectives, which have little to do with the efficiencies or effectiveness of any program objectives.

Block grants shift the battle to protect safety net programs to 50 separate arenas. On the first day of the 104th Congress, Gingrich told the Washington Times: "What I can do between now and Easter is break up the Washington logjam, shift power back to the fifty states, break up all the liberal national organizations—and make them scramble to the state capitals in Texas, Georgia, and in Missouri." A much larger purpose, however, shared by numerous Republicans, is the ultimate dismantling of New Deal and Great Society programs.

If eliminating government programs is not the real purpose of the "new federalism," then there needs to be a new and serious debate about the appropriate roles of the federal government and the states. One model that could be borrowed from the states is capital budgeting. A federal capital budget would make good policy sense in its own terms. It would call attention to the fact that public borrowing can equal productive investment.

President Clinton, if re-elected, should stop giving aid and comfort to any form of absolute budget balance. The extreme backloading, which would leave the most severe cuts to his successor after 2001, suggests that the goal has never been realistic. Democrats made a mistake when they embraced budget balance in any form. Now, they need to begin a more sophisticated national conversation about fiscal policy, before their "cover" becomes their suffocation.

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