Aristotle on a Balanced Budget Amendment

Some things never change: despite radical growth in technologically driven material abundance, humans today fundamentally exhibit the same characteristics of those living at the time of Aristotle, roughly 2,400 years ago. Some are wise, productive, and virtuous; others are selfish, lazy, and scoundrels. Thus, some of the wisdom of Aristotle may then be relevant to how we collectively behave today. That came home to me in reading the first volume in the epic two-volume The Golden Thread: A History of the Western Tradition, by Allen Guelzo and James Hankins.

Specifically, on p. 169, Aristotle says: “[T]here is no use in the most valuable laws … ratified by the … whole body of citizens, if these are not trained and educated in the constitution… for there is such a thing as want of self-discipline in a state, as well as in an individual.”

Any objective analysis of modern American national politics would have to concede that there is a huge lack of “self-discipline” from our nation’s elected officials in the legislative and executive branches of government that govern our fiscal policy. My scholarly field of economics is a major reason for this: self-discipline in matters of government finance prevailed until the Keynesian Revolution of the 1930s. Lord Keynes had famously said that “in the long run, we are all dead,” advocating expansionary fiscal policy in order to maintain high employment and prosperity: governments should sometimes deliberately spend more money than they receive from taxpayers. Budget deficits can therefore promote prosperity. (RELATED: 50-Year Home Loan the Worst Idea Since New Coke)

Keynes was wrong on two fronts. First, history has shown that expansionary Keynesian fiscal policy (spending borrowed money) has only a so-so record of achieving goals like full employment — the 1970s, for example, was a period of substantial unemployment and budget deficits, giving us a new term, “stagflation.” Second, we are not all dead in the long run, and in any case, long-term prosperity and economic stability for our children and grandchildren is a real and worthwhile human objective. (RELATED: The Answer to Republicans’ ‘Affordability Problem’? Unleash Supply.)

Before Keynes, our nation had what the late Nobel Prize-winning economist James Buchanan and some of his associates called “an unwritten fiscal constitution”: prudence dictates that in years outside of wartime threats to national security, nations should finance current spending entirely by taxation and other revenue-raising means such as land sales. Indeed, it should aim to reduce the national debt in periods of prosperity by running budget surpluses that could be used to reduce indebtedness.

Compare the pre-Keynesian first three decades of the last century with the first quarter of this one. In the earlier era of the unwritten fiscal constitution, in over two-thirds of the years, the nation ran budget surpluses, including every year from 1919 through 1930. Since 2001, we have had budget deficits every single year. The self-discipline that Aristotle spoke about, once present, has dissipated. As in ancient times, nations and their leaders go through periods of responsible, disciplined behavior and eras of reckless overspending. Constitutional strictures are needed to moderate, if not eliminate, spasms of collective irresponsibility.

Moreover, while a half-century or so ago the blame for deficit spending usually was a bit greater for Democrats (who favored Keynesian-style deficit spending deplored by more conservative Republicans), today, the blame falls on both parties.

In the last year, amidst large deficits, the Republicans proposed a budget that maintained expiring tax breaks and added such costly (and not growth-inducing) provisions as exempting overtime and tip income from taxation. But the Democrats were willing to close the government down unless some very costly, ostensibly temporary pandemic-era health care benefits to some low-income persons were extended. Neither party seemingly has an ounce of Aristotelian self-discipline, necessitating a constitutional response. (RELATED: How Did We Reach a $38 Trillion Debt During a ‘Shutdown’?)

The U.S., along with most of the rest of the world, is entering an unprecedented future economic challenge arising from a dramatic decline in fertility accompanying equally dramatic medical advances. We are becoming an age of old people, creating growing burdens on the working-age population. Our pension and health care programs aiding the elderly are already approaching insolvency. Something must happen, and shortly.

Yet currently, our lawmakers perceive that usually the marginal political benefits of spending more, or taxing less, far exceed the marginal political costs. Deficit spending enhances job security. Constitutional restraints on that deficit spending would raise the political costs of it dramatically. By contrast, state governments, almost all of which have balanced budget amendments, are considerably more fiscally responsible than the Feds, although some have still found ways to behave irresponsibly, for example, by having generous public employee pension systems that are scantily funded.

Probably wisely, the Founders made it difficult, but not impossible, to amend the U.S. Constitution — it has been a third of a century (1992) since the 27th amendment was ratified. There are two ways constitutional revision can happen: one initiated by two-thirds (34) of the states via a constitutional convention, and the second initiated by Congress (two-thirds majority in both the House and Senate) with subsequent approval of three-quarters (38) of the states. Late in the last century, an attempt using the first approach got somewhat close to approval, but no convention has been called since the original one more than two centuries ago.

The American problem is a worldwide one, with national debt to output levels reaching extraordinarily high levels. In Japan, for example, the debt approximates two years’ national output, and high debt is a big factor in Japan’s relative economic stagnation over the past three decades. Many European nations likewise have worrisome debt-to-output ratios.

In order to meet the obligations of paying off bondholders, an irresponsible approach would be to print money or the equivalent — make the real value of the existing debt less by lowering the value of the dollar. If the U.S. were to do that, its valuable role of having the world’s universally accepted currency — the dollar — would no doubt cease, having all sorts of negative consequences, including a loss of national pride from shrunken American economic exceptionalism.

In short, the immediate political costs of easing this problem in the U.S. are quite consequential, but far less than the longer-term costs to our society arising from the fiscal profligacy that Aristotle warned required constitutional constraints.

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Richard Vedder is a distinguished professor of economics emeritus at Ohio University and senior fellow at both Unleash Prosperity and the Independent Institute.