Balancing the Budget Is Not Enough

For decades the American people have sought a solution to the alarming rise in federal spending. At last they seem on the verge of getting a balanced budget amendment to the Constitution via its Article V. Congress would never approve a limit on federal spending, but Article V allows the states to impose this on Congress.

For this to occur, Article V requires two-thirds of the states (34 states) to pass a resolution for a convention for amending the constitution. Twenty-eight states have already done so, and an additional six are likely to join in 2017. Any amendment approved by the convention will then have to be approved by three-fourths of the states.

If a balanced budget amendment—which I favor—becomes a reality, it will be a tremendous achievement, but it will not solve all our problems with federal spending. This is because (1) the government is “cooking the books” on federal spending, (2) the Federal Reserve is the engine of inflation for accommodating that spending, and (3) there is no limit to the amount of money the Fed can create since it is not backed by gold. Let's take these topics in order.

 

Cooking the books

“Congress plays games with the budget in so many ways it is hardly a stretch to say that if it was held to the same accounting standards as public corporations the entire Congress would be in jail for fraud,” says Paul Gutterman, director of the Masters of Business Taxation Program at the University of Minnesota. Here are some examples from my book, The Impending Monetary Revolution, the Dollar and Gold:

An official projection of a taxpayer gain of $14 billion at the Export-Import Bank is actually a $2 billion loss.

The $63 billion officially expected from FHA's single family mortgage guarantee program is in reality a $30 billion loss.

The Congressional Budget Office says the four largest student loan programs will yield a saving of $135 billion in fiscal years 2015-2024. But it notes that under fair value accounting that is practiced in the real world, those programs would likely cost $88 billion rather than save $135 billion.

David Stockman, a former director of the Office of Management and Budget, recently wrote:

Hundreds of billions are being added to the public debt each year which are being erased from the official deficit number due to the peculiarities of government accounting. For example: during the last two years nearly $200 billion was borrowed by Uncle Sam to fund student loans, but that didn't count in the official deficit because these outlays are considered "investments", not “spending.”

Stockman also wrote:

The combined official deficit for FY 2015 and 2016 was $1.025 trillion. But the public debt rose by $1.7 trillion during that period, meaning that upwards of $700 billion of red ink didn't get counted in the deficit. [emphasis in the original.]

Professor Gutterman says “Congress is cooking the books to minimize our long-term budget difficulties. The bottom line is that no matter how bad you think the budget deficit is, it is actually far worse.”

What happens if Congress does not balance the budget? There are two possibilities. First, the government might just shut down as happened in the past when Congress couldn't agree on raising the national debt ceiling. That is exactly what happened in the last (partial) shutdown when the Republicans refused to raise the debt ceiling—until they finally caved in to prevent further loss of public support. We need a constitutional amendment that prevents one party from demanding the other cut federal spending from its favored programs in order to avoid cutting its own favored programs to reach a balanced budget.

Second, even if the government passes a proposed balanced budget, it may turn out that by the end of the fiscal year—due to government's phony accounting—the budget is not balanced after all. We need a constitutional amendment to cover both of these possibilities.

Warren Buffet has voiced an interesting solution. He said to pass a law saying if there is “a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for reelection.” Of course, this was immediately dismissed as unrealistic because Congress would never pass a law to limit its power to spend, nor would it propose a constitutional amendment to do so. However, an Article V convention leaves Congress no role in proposed amendments, so Buffet's basic idea would be workable and should be considered. My objection to it is the trigger of “a deficit of more than 3% of GDP,” because I wouldn't trust the government which has exhibited such notoriously phony calculations to make an honest calculation of something as complicated as GDP. My preference would be for a simple balancing of outlays with receipts. Therefore, I propose modifying Buffett's proposal to read: If the government shuts down from failure to pass a balanced budget, or in any fiscal year in which the budget outlays of the federal government exceed its receipts, for which no correction is made within 60 days, all sitting members of Congress are ineligible for reelection. And any shortfall from the current year must be made up the following year or all sitting members shall again be ineligible for reelection. I like the idea that Buffet's proposal would eliminate one party trying to gain political favor by blaming the other for failure to make necessary budget cuts since sitting members of both parties would be made ineligible for reelection.

My book includes an alternative amendment proposed by George Price:

Section 1. Within two months after the close of any fiscal year in which the federal Government has borrowed more money than it has repaid, one 10th of the full membership of the House of Representatives and one 10th of the full membership of the Senate shall be chosen by lot and expelled from office. The vacated offices shall be expeditiously filled by election or appointment, in the manner prescribed elsewhere in this Constitution.

Section 2. Those expelled shall not be elected or appointed to any office, or otherwise employed, in any branch of the federal Government for a period of three years for expelled Representatives and seven years for expelled Senators.

Observe that the destructive tendency of using government spending to “buy” elections will now be reversed. Profligate spending to win elections will now be replaced by frugality to avoid being thrown out of office. Moreover, having experienced the destruction of the dollar from excessive spending, the voters may well place more value on thrift than of the illusory promises of spending by political candidates.

This amendment proposal might seem drastic and perhaps unfair. You might think it would be better to confine the expulsion of office to the tenth of the office holders who voted for the most spending. However, this would be less effective than having them drawn by lot. For one thing, it would mean that the bottom nine-tenths of senators and representatives would feel they were safe to spend even more so long as they did not reach the top ten percent level; total spending could actually increase. For another, having the expulsion drawn by lot would mean no member of those legislative bodies would be safe from the process. Those enjoying the best reputations or having won their elections by the biggest margins would still be vulnerable. Facing their own possibility of losing office—even if they were far from the top tenth in advocating spending—they would likely put pressure on their extravagant colleagues to be more frugal by denying them party endorsement and campaign funds if they advocated too much spending.

Price writes, “On the very rare occasions when a deficit is actually justified, the expelled legislators should consider their sacrifice a patriotic duty.” He adds, “Once in operation, if it proved to be not strong enough, we could make it two 10ths.”

The Federal Reserve, Engine of Inflation

Congress prepares a budget which the president then approves, and the Fed accommodates the government financing needs by manipulating credit in the banking system.

Most people, even those who believe in free markets and gold-backed money, think a central bank is essential in the modern world to control the money supply and manage the economy in various ways. But Paul Volcker, a former chairman of the Federal Reserve, has stated:

With a few exceptions...central banking is almost entirely a phenomenon of the twentieth century. And there were market economies long before the twentieth century. Indeed, to some extent, central banks were looked upon and created as a means of financing the government, which I do not think people have in mind when they think about central banking today....If you say a central bank is essential to a market economy, I have to ask you about Hong Kong, which has no central bank at all in the absolute epitome of a free market economy. Yet it does quite well in terms of economic growth and stability. [emphasis added]

Richard Salsman, a former banker and author of a book on central banking, writes:

Central banks are bankers to unlimited governments, governments that spend more than they have been willing or able to levy in taxes on the populace.... Constitutionally limited and creditworthy governments do not need central banks. They are able to finance their operations in a free market with ready access to the private credit system. [emphasis added]

In my book, The Impending Monetary Revolution, the Dollar and Gold, I have further discussion on central banking and quotes from several other books by experts that have similar messages. But you get the message: central banks are tools for unlimited governments; if you don't want unlimited government, then you don't need or want a central bank.

Kevin Hassett, a former senior economist at the Federal Reserve, recently wrote:

“If you look at the activities that the Federal Reserve engages in these days and compare them with the things it has the authority to do, the difference is mind-boggling. For example, the Fed currently does not rely on congressional approval for its funding. Instead, it holds a large portfolio of bonds and funds itself from the interest they earn, returning the residual to the U.S. treasury.

But the Fed acquires the bonds with a kind of sleight-of-hand. It approaches a bank that has a reserve account at the Fed and purchases, say, a million dollars of bonds. It then pays for the bonds simply by crediting the bank's reserve account with a million dollars. Nobody has to print any money for this. The Fed simply turns the knob on a reserve account in exchange for a financial asset. The Fed's use of this device has expanded greatly in recent years ...The Fed could, in theory, add to its funding in this way indefinitely.

[The Fed] was originally was supposed to cover its own costs by fees from the banks it regulates, but the functions and “costs” have escalated enormously in the years since. Back in the day, it was never envisioned that the Federal Reserve might accrue a large balance sheet, because the U.S. was on the gold standard when the Fed was created. With money and gold connected, spinning knobs to acquire bonds was simply not an option.[emphasis added]...As with many activities, the Fed simply started doing novel things that Congress never authorized it to do, and since nobody objected, it kept doing them...The fed is an institution that has broken free of its mooring. Its structure is unconstitutional.... It has expanded its role in the economy immensely, often without any legal authority to do so.”

Hassett also notes that “parts of the Federal Reserve's design that are established by legislation have questionable legality”; that the supposed “political independence” of the Fed is “an empty concept”; and that the Dodd-Frank regulatory reforms “gave the Federal Reserve an extraordinary amount of discretion to craft new banking regulations.”

First of all, notice in Hassett's first paragraph above that the Fed funds itself; it is not dependent on Congress for funding. This means it will be unaffected by a balanced budget amendment; the budget pertains to Congressional appropriations. Second, the one thing that formerly limited the Fed's ability to create money in the banking system by buying bonds was connection between money and gold—and that the Fed could “add to its funding in this way [by buying bonds with only credit entries] indefinitely.”

We need a constitutional amendment to end the Federal Reserve.

The Gold Standard

The gold standard and free banking flourished in the the 19^th century, particularly the latter part, and up to 1914, when World War I broke out and the Federal Reserve system began. Before that war every country had its own unit of account, such as the pound in England, the dollar in the United States, and the franc in France. Since these and other currencies throughout the world were defined as specific weights of gold, they were all interchangeable at a fixed rate. Money under the classical gold standard was truly global. The world effectively used one kind of money, and that money was gold.

After the first World War broke out, Canada, New Zealand and other countries with free banking systems, adopted government controls of the money supply to help finance their war efforts. After the war, the League of Nations recommended that nations without a central bank get one.

During the gold-standard years, there was no U.S. central bank, no “monetary policy,” no legal tender laws, no federal deposit insurance, and no limit on the minting of coins by private banks. Yet it was a time of price stability and great economic advancement. Michael Bardo, an economics professor at Rutgers University, who is also associated with the National Bureau of Economic Research, has written:

The period from 1880 to 1914, known as the heyday of the gold standard, was a remarkable period in world economic history....In several respects, the economic performance in the United States and the United Kingdom was superior under the classical gold standard to that of the subsequent period of managed fiduciary media. In particular, both the price level and real economic activity were more stable in the pre-World War I gold standard period than in the subsequent six-and-one-half decades. [emphasis added].

Professor Lawrence H. White, a specialist in the theory and history of money, writes that, based on a large body of evidence, “the aggregated performance of an economy on a gold standard is likely to be better under free market banking than under central banking.”

Salzman writes that under free banking, “Sound lending practices were commonplace. There was no reckless hunt for marginally creditworthy borrowers. Free banks financed the most productive enterprises and rewarded the most prudent savers....Free banking systems fueled no reckless inflations, credit expansions, or panics.”

Kurt Schuler, an economist in the Office of International Affairs at the U.S. Treasury Department, says: “Free banking was widespread, much more common than people supposed, and generally worked quite well. The economic logic that underlies free banking is timeless, and the same forces that made free banking a stable and efficient system in the 19^th century would equally well apply today.”

The great economist Ludwig von Mises wrote:

The gold standard was an international standard. It safeguarded the stability of foreign exchange rates. It was a corollary of free trade and the division of labor...The gold standard put a check on governmental plans for easy money. It was impossible to indulge in credit expansion and yet cling to the gold parity permanently fixed into law. Governments had to choose between the gold standard and their—in the long run disastrous—policy of credit expansion. The gold standard did not collapse. The governments destroyed it.

We need amendment(s) to restore the gold standard and free banking and eliminate our central bank, the Fed.

For more on the issues of this posting as well as other constitutional amendments we propose, see our book The Impending Monetary Revolution, the Dollar and Gold, Second Edition. Be sure to get the Second Edition because it contains six additional chapters not included in the previous edition. Amazon.com does not sell the Second Edition. It and the “other sellers” it lists—except for “amlibpub3,” which is us—sell only the first edition. Buy direct from the publisher, American Liberty Publishers (www.amlibpub.com), and get your book autographed. No shipping charge in U.S.