Glenn Hubbard and Tim Kane write,
One new approach has been proposed by Congressman Justin Amash (a Republican from Michigan) and has won some bipartisan support. His plan would essentially involve balancing the budget over the years of a business cycle. For instance, the proposal’s rule constraining annual outlays (including changes in accrued net liabilities in entitlement programs, as noted above) to a level no greater than the average annual tax revenue of the previous three fiscal years would be far easier for Congress to adhere to. Congress could, with a three-fourths vote, override that constraint during wars or deep recessions.
The parenthetical remark about accrued net liabilities is important. Each year, as demographics and other factors change, the outlook for Social Security and Medicare changes (typically, for the worse). Accrual accounting would put these changes onto the budget.
The prisoners’ dilemma analysis makes a lot of sense. But what I didn’t see or understand from the article was how political actors would be incentivized to adopt these sensible reforms. Isn’t it going to be in each politician’s best short term interest to continue the farce we have today?
Accounting for entitlement programs properly would be a huge step forward, and also something that conservative/libertarian members of Congress just might manage to get done.
The best balanced budget amendment I’ve seen is from Barnett’s Bill of Federalism. That gave the President line item veto authority when there was a deficit and took it away when the budget balanced. That gives great incentives for each side to push for honesty while letting them cooperate in an emergency.