Transcript of the 2012 Walter Berns Constitution Day lecture: Spending, public debt, and constitutional design

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Spending, public debt, and constitutional design

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You may have noticed we are in a presidential election year.

You can tell by the serious and sober analyses the candidates are offering for how to solve the nation’s most pressing problems. Both sides have put forward detailed plans for bringing our fiscal house into order, and the essence of the campaign is a competition to persuade the people of why one plan will have better consequences than the other. The framers would be proud of the way our democratic political system is working.

Just joking.

This year, the United States government will spend approximately $3.5 trillion. Over the last three years, federal spending has soared to peacetime record levels of over 24 percent of gross domestic product (GDP). We are borrowing 40 cents out of every dollar of that $3.5 trillion. For four years in a row, the federal deficit has exceeded $1.1 trillion. These annual deficits are adding up. As our two great political parties conducted their national conventions, the accumulated federal debt reached a total of $16 trillion.

Everyone agrees this cannot and must not continue. The word du jour is “unsustainable,” which my handy political glossary defines as meaning the problem is too hard to solve.

What concerns many Americans most is not just the spending, and the taxing, and the borrowing, and the debt, but the political paralysis and ineptitude with which it is greeted.

At one great political convention, the debt clock was prominently featured, which was a sign of a certain level of seriousness about the problem. And the party clearly has some ideas about what is necessary to bring it under control. But did they explain those ideas to the American public? Did they begin to build the political argument for taking serious action? Did they make clear what they would actually do about it?

Not so much.

But that was the responsible party. For the other party, the spending appears to be a virtue, the burgeoning debt somebody else’s fault, and the deficit scarcely acknowledged as a problem. The nation is headed for fiscal catastrophe, but this scarcely warrants mention at the national convention of our largest political party.

Worse yet, the Senate has deliberately refused to pass a budget for the last three years—despite its legal obligation to do so—and Congress has not passed a single appropriations bill for the fiscal year that starts in just over two weeks. Apparently, they are afraid that if they revealed their plans for federal spending, the voters would not like what they see. So let’s not budget at all.

This systematic inattention to fiscal problems makes many of us wonder whether ordinary democratic politics is capable of dealing with issues of spending and debt. Maybe we have a structural failure of institutions.

And indeed, looking around the globe at our fellow Western democracies, we are not alone. With a few honorable exceptions—Canada, for example, and maybe Sweden, and a few others—Western democratic governments are drowning in sovereign debt, with little or no sign of political resolve to do much about it than to ask for bailouts from central banks and stronger economies.

Spending and debt are quintessential political issues, one might think. Political, not legal. Political, not constitutional. But is this necessarily so?

Just yesterday, the German constitutional court handed down one of the most significant decisions in its history, upholding the European Stability Mechanism over the constitutional claim that it yields German sovereignty to institutions that lack the essential attributes of democratic legitimacy. In Germany, there is no doubt that issues of public debt raise high questions of constitutional design.

And just last June, our Supreme Court handed down possibly the first decision in its history holding that the spending power under the United States Constitution is limited by principles of federalism.

So I want to talk about spending, public debt, and constitutional design in the United States Constitution.

Article One, Section Eight, Clause Two allows Congress to borrow money on the credit of the United States. It imposes no limit, but note that granting this power to the legislative branch denies it to the executive. Under the unwritten British Constitution prior to the Glorious Revolution, the king could borrow money as a matter of his own prerogative authority, which kings frequently did, with disastrous results.

The British experience in the century prior to the Constitution suggested that parliamentary control over borrowing was a real, substantial, and effective check on excessive public debt. And so the framers imitated that. Some people thought, last summer, that President Obama should raise the debt ceiling on his own authority, which would have violated this fundamental constitutional principle. But Obama is only president of the United States. He is not King Charles II.

Some among the founding generation would have imposed more strenuous limitations. Thomas Jefferson argued that the federal government should have no power to borrow, which would have been an effective balanced budget amendment. More precisely, in a 1790 letter to James Madison, Jefferson argued that no generation had the right to impose debt on a subsequent generation.

“No man,” Jefferson wrote, “can, by natural right, oblige . . . the persons who succeed him . . . to the paiment of debts contracted by him.”

Suppose Louis XV. and his co[n]temporary generation had said to the money-lenders of Genoa, give us money that we may eat, drink, and be merry in our day; and on condition you will demand no interest till the end of 19. years you shall then for ever after receive an annual interest of 125/8 per cent. The money is lent on these conditions, is divided among the living, eaten, drank, and squandered. Would the present generation be obliged to apply the produce of the earth and of their labour to replace their dissipations? Not at all.[1]

Jefferson was on to something. Democracies are subject to the temptation of looting the income of future citizens. Voters today may have some solicitude for the welfare of their grandchildren, but not as much as they have for themselves. Borrowing money for current expenditures, and adding it to the public debt, is—as Jefferson recognized—nothing other than robbing the future of their equal rights.

Future generations will have all the needs we have for defense, social spending, education, health care, and the like. It will be no easier for them to finance their expenditures out of taxation than it is for us. But on top of those burdens, our children and grandchildren will have to pay the interest and maybe even the principal on the $16 trillion of public debt that we have run up through our failure to get the budget in order.

But future generations cannot vote. Current voters—current taxpayers—benefit by spending now and passing the bill to the future.

The underfunding of public pensions is a particularly egregious example. Future pensions are part of the pay of current public employees, and the cost of future pensions should be treated as part of the cost of current operations, paid for out of current taxes. The practice of underfunding pensions is nothing other than asking future generations to pay for our police, teachers, firemen, and road crews. Jefferson would ask: “Why should they?”

If we believe that constitutions should be drafted to protect against systemic democratic maladies, Jefferson would seem to be right in suggesting that we need to use constitutional devices to protect future generations who cannot vote from being sacrificed to the interests of current voters. Balanced budget provisions are not merely an attempt to enshrine a particular economic philosophy into constitutional law—something I disapprove of—but a way to counteract an inherent bias of democracy in favor of the present at the expense of the future.

But Madison had an interesting and compelling response to Jefferson. Some expenditures, he pointed out, are incurred for the benefit of future generations. He pointed to the cost of “repelling a conquest.”[2] He might have pointed to such things as purchasing Louisiana, which was done by borrowing—except he was writing in 1790, not 1803. When the government purchases a physical asset that will yield benefits for many years to come, there is nothing wrong with spreading the cost over those years of benefit, and the way to do that is through incurring debt. If governments cannot borrow for the purchase of infrastructure and other assets, then the same democratic preference for the present over the future would lead to significant underinvestment.

When I was a junior lawyer in the US Office of Management and Budget (OMB) in the early 1980s, I was tasked with drafting a sensible balanced budget amendment, or, rather, several possible versions. The most difficult aspect was trying to incorporate Madison’s insight that the purchase of valuable physical assets should be an exception. The trouble is that almost any expenditure can be called an investment and be characterized as producing future benefits. In principle, abusive borrowing is a proper subject for constitutional design, but it is very difficult to get it right.

Then there was Alexander Hamilton. Hamilton, the most sophisticated economist among the major founders, recognized—as Jefferson and Madison did not—that public debt at a manageable level can serve the macroeconomic interests of the nation by supplying a store of value and easily transferrable medium of exchange—in short, a money supply.

It is probably not in the national interest for the public debt to be zero. US treasuries, effectively risk-free assets (at least for a while longer) are vital for just the reason Hamilton foresaw. Moreover, a growing economy requires an ever-larger pool of treasuries as a medium of exchange. So, a balanced budget is probably not quite right. As long as the deficit stays, on average, below the rate of growth of the economy, the public debt will be a “public blessing,” to use Hamilton’s language, and not a curse.[3]

Alas, the deficit today is careening toward 7 percent of GDP, which is a different matter altogether. Economists tell us that when sovereign debt exceeds 90 percent of GDP—ours is currently in the low seventies, but rising fast—economic growth slows, interest rates rise, and it is very difficult to recover from the spiral. Ask the Greeks, if you do not believe the economists.

Keynesians will say that it is important to allow the federal government to engage in countercyclical fiscal policy, incurring debt in bad times and running surpluses in good. I am not sure whether I believe that, but even if I did, I would note that Keynesianism in practice seems to justify deficits in bad times, but to tolerate deficits in good times as well. The United States has run a surplus only five times in the last half century—an era of unprecedented economic growth. Times never seem to be good enough to take away the punch bowl from the party, to use Alan Greenspan’s amusing metaphor.

What about spending? Most people regard the spending power as a “plenary” power limited only by the political process. The founders would have been surprised at this.

Spending from the national treasury presents a classic collective action problem—the veritable tragedy of the commons. Everyone who benefits from the spending gains a great deal, while suffering only a tiny fraction of the burden of taxation to support it. No one will apply cost-benefit analysis to his or her political demands because the benefit will greatly outweigh the cost—even if the benefit is negligible in comparison to the total cost. This is an obvious problem that the founders as practical politicians surely understood.

No one at the founding—indeed, no one for the first century of the republic, as far as I can tell—thought that Congress had unlimited discretion to spend on whatever it wished. Article One, Section Eight, Clause One limits Congress’s use of tax funds to promoting the “general welfare.” Today, this phrase has little or no meaning. But the term had actual limiting content at the time.

There were two competing interpretations. Madison argued that the general welfare was a quick way of saying that Congress could spend money only in service of the other enumerated federal powers. He had some support for this in the language and accepted interpretation of the Articles of Confederation.[4] I have to say, though, that as a matter of ordinary English usage, this interpretation strikes me as far-fetched.

Hamilton, in his Report on Manufactures, argued that the term “general” distinguished between genuinely national and merely local purposes. Thus, to be legitimate, “the object to which an appropriation of money is to be made [must] be General and not local; its operation extending in fact, or by possibility, throughout the Union, and not being confined to a particular spot.”[5]

In the founding period, the word “general” was used more precisely than we use it today. It was the term used for matters pertaining to the Union as a whole. Thus, they spoke of the “general” government (not the “national” government), and of “general” as opposed to “local” concerns. Hamilton’s position was thus based on the ordinary meaning of the text.

Under Hamilton’s interpretation, the clause addressed the collective action problem on a geographical basis. If merely local purposes are excluded, there will be no scrambling by particular representatives of particular places for maximum exploitation of the common fund. This may be an incomplete solution to the problem—there may be other forms of the tragedy of the commons than geographical—but it does address an important slice of the problem in a republic where representatives are elected on a local basis.

Hamilton’s interpretation of the clause finds support in a debate at the Constitutional Convention in Philadelphia. Benjamin Franklin made a motion to give Congress the power to construct canals, a motion Madison supported on the ground that canals would foster “easy communication between the States” and thus promote economic integration in tandem with the political integration the new Constitution would bring.[6]

The immensely shrewd and practical Roger Sherman objected, saying that the benefit would “accrue to the places where the canals may be cut” while the expense would fall to the United States as a whole—an objection that many delegates apparently found persuasive. Franklin’s motion lost eight states to three. It seems likely that the general welfare condition on the spending clause reflected the same distaste for allowing the general treasury to be tapped for localized benefit.[7]

In a moment, I will argue that this principle provides a partial solution to some of our contentious modern debates over spending. But first: how did it work?

The first appropriations statute, in 1789, contained no specific items. In its entirety, it appropriated $137,000 for the War Department, $190,000 for repayment of certain Treasury warrants, $96,000 for veterans’ pensions, and $216,000 for the “civil list,” meaning everything else.[8]

But the second appropriations statute, in 1790, contained an appropriation for the construction of a lighthouse on Cape Henry in Virginia. This seems to present the same problem as Franklin’s canals, and the proposal set off the nation’s first constitutional debate over the scope and meaning of the spending power. Following Madison’s approach, the lighthouse might be defended as “incidental to commerce” or possibly in service of a navy (when we would get a navy).

But what seemed to be decisive is the fact that the lighthouse had been authorized the previous year in a statute that would federalize all “lighthouses, beacons, buoys, and public piers” up and down the eastern seaboard.[9] In light of that statute, the Cape Henry lighthouse was part of a project that served the “general welfare” and not just local interests.

In the same year, Congress refused to fund the removal of obstructions to navigation in the Savannah River. That project was alone, divorced from any general legislation.

Perhaps the clearest example of this interpretation of the clause was President Andrew Jackson’s veto of an appropriation to build a road from Maysville, Kentucky, to the Ohio River, a stretch of highway entirely within the state of Kentucky, coupled with his approval of an appropriations bill for the Cumberland Road, also known as the National Road, which linked the eastern seaboard with Ohio, Indiana, and Illinois. The National Road fell even within Jackson’s grudging interpretation of the general welfare.

This does not mean that Congress must always allocate funds evenly among the states, but that its spending decisions must be based on criteria that “exten[d], in fact, or by possibility, throughout the Union.”

Distinctions of this sort may not be judicially administrable. Distinctions between general and local are matters of degree. But for almost the first century of the republic, these distinctions were vigorously debated and recognized by conscientious Congresses and still more conscientious presidents, who took seriously their duties to enforce the Constitution.

What might be the significance today of a limitation of congressional spending authority to projects whose benefits are “General and not local”?

Well, for a start, what about earmarks, which are appropriations for specific projects not part of, or evaluated pursuant to, any broader or more general program? Are they constitutional?

I am not asking whether the courts would strike earmarks down. Presumably, no one has standing to challenge these appropriations in court. I am asking whether a conscientious legislator or president would regard these projects as serving a purpose that extends in fact, or by possibility, throughout the Union.

Earmarks are not a large part of the budget—they were not a large part even before the current supposed moratorium. But they are a gateway drug to irresponsible spending, and an invitation to corruption.

When the costs of a local project—let’s say, refurbishing a local park—and the benefits of the project are borne by the same set of taxpayers, we can assume that at some rough-and-ready level, the project will not be approved unless the benefits exceed the costs. But if someone else is paying the bill, the costs do not much matter. The benefits will get all the attention. Do you think Californians would pay their own good money to build a high-speed rail link between Bakersfield and Fresno?

Even if a project is not wasteful, it violates the terms of our national compact for the entire nation to pay for projects that benefit only one local area. That was Roger Sherman’s point, which carried the day at the Constitutional Convention. Why should taxpayers all over the country fund a sewer improvement project for Modesto, California, when other cities have to fund such projects for themselves?

The general welfare limitation addresses the collective action problem that advocates of concentrated benefits will invest more in political effort than broadly dispersed bearers of the attendant costs.

Hamilton espoused the broadest understanding of the spending power among the major framers. But even he would have said that modern earmarking is an abuse of our constitutional design.

The general welfare limitation may also provide a more satisfactory—if more radical—way of thinking about the Medicaid expansion in the 2012 health care decision National Federation of Independent Business v. Sebelius (NFIB).

You will recall that Congress required the states to expand Medicaid eligibility to all persons, including childless adults, below 133 percent of the poverty line; if they did not, they would lose all of their Medicaid funds. The US Supreme Court, in an impressive seven-to-two majority in which Justices Stephen Breyer and Elena Kagan joined the more conservative justices, held that this threat of a cutoff was so coercive as to be unconstitutional.

But the NFIB court’s treatment of the issue is anything but crisp and clear. Indeed, the court expressly declined to “fix a line” between permissible encouragement and impermissible coercion—it simply held that the Medicaid expansion was beyond the line.

The court framed the issue as whether a state has “a legitimate choice whether to accept the federal conditions in exchange for federal funds.” That question led the court to make a series of shades-of-grey distinctions:

1. The size of the grant that would be withdrawn,

2. Whether the newly imposed conditions make the law “in reality a new program” rather than a “modification” of the old,

3. Whether the states are threatened with loss of “existing” funding or merely new sources of funding, and,

4. Whether the attached conditions are ones that “govern the use of the funds” or instead “take the form of threats to terminate other significant independent grants . . . as a means of pressuring the States to accept policy changes.”[10]

 

These considerations have a certain common sense to them, but the line-drawing problems are likely to prove intractable. It is particularly perplexing that the court distinguished, instead of overruling, an earlier case where Congress cut off 5 percent of the federal highway funds for any state that did not pass a twenty-one-year-old drinking age. The court called that a “relatively mild encouragement,” in contrast to the Medicaid provision, which it called a “gun to the head.” But the two provisions are structurally and pragmatically indistinguishable.[11]

Let me float an idea—more radical than the court’s holding, but possibly more administrable, and rooted in the constitutional text as originally understood. The idea may not be appropriate for judicial review, and it may not hold up to scrutiny. I am hoping to generate some thought.

My tentative suggestion is this: if Congress may spend only for the “general” welfare, it would be unconstitutional for Congress to set up a Medicaid system where funds are spent in all states except for one (or some). It has to be a general program, extending throughout the Union.

And as with other equal-access regimes, it is presumptively unconstitutional for the government to exclude citizens on account of their exercise of a constitutional right—in this case, the state’s constitutional right not to administer a federal program.

Justice Ruth Bader Ginsburg’s dissent on the spending clause issue maintains that “A State . . . has no claim on the money its residents pay in federal taxes.”[12] That is technically true. But if Hamilton was correct, the people of every state do have a constitutional right (whether or not judicially enforceable) to insist that federal spending be for general purposes, meaning extending to the entire Union. It arguably violates that principle to cut off a state’s residents as a means of pressuring their state government to adopt policies Congress otherwise has no authority to compel the states to adopt.

We must not fall into the trap of thinking that federal grants are a “gift,” as Justice Ginsburg misleadingly stated in her dissenting opinion. The monies are forcibly extracted from the people of every state, and the people of every state are entitled to benefit from them. That is what the court’s conception of “coercion” seems to overlook.

This does not render Congress powerless to impose conditions that ensure that funds are properly spent. Congress need not grant funds to state governments that refuse to comply with clearly stated funding conditions. But, according to this theory, Congress’s remedy if a state refuses to comply is not to cut the state’s citizens off from the benefits of their tax dollars, but to bypass the state government and administer the program directly—through federal agencies or nonstate grantees. The people of the state would not be cut out; only the government of the state would be cut out. The right of equal treatment belongs to the people of the states, not to the state governments.

This, interestingly, is the way Obamacare’s “health benefit exchanges” work. If a state declines to operate such an exchange in accordance with the statute’s dictates, the federal government will step in and do so in that state. This satisfies the constitutional requirement that spending be for the general welfare because taxpayers in every state will receive the benefit.

For Congress to cut off particular states and deny their citizens any benefit renders the program less than general, and hence unconstitutional.

Regardless of how any particular controversy might be resolved, I hope I have persuaded you that both the spending clause and the borrowing clause raise important issues of constitutional design, based on the collective action problems these powers present.

But recent events may give us reason to doubt that constitutional design can place a real restraint on political leaders determined to rack up more spending and more public debt. Europe’s constitutional design appears to prohibit bailouts of its member states, and to prevent the central bank from purchasing sovereign debt. But once the political elite claimed that bailouts and central bank interventions were all that stood between Europe and the abyss, those restrictions were quickly disregarded.

Similarly, here the many state constitutional provisions requiring balanced budgets have easily been evaded, partly by clever devices and partly by, well, ignoring them. Who would know that California’s constitution requires a balanced budget?

The 2011 Budget Control Act places a legal requirement on Congress to pass an annual budget well in advance of the new fiscal year, and to conform actual appropriations to the budget. In my day at OMB, this obligation was held sacrosanct and faithfully obeyed. Not so, anymore.

Madison warned that constitutional limits on governmental abuse would be mere parchment barriers if not reflected in the deep structure of accountable representation and separation of powers. The Anti-Federalists were even more pessimistic, saying that the only real restraint comes from an active and engaged citizenry—the very thing that Madison’s Constitution sought to neutralize, on the assumption that the populace would generally favor short-sighted policies, like “spend now, pay later.”

For a few important months in 2010, an active and engaged citizenry were in the streets and at town halls demanding an end to the abuse. “Spend less, tax less, borrow less,” they said. Since that time, our government in Washington has spent more and borrowed more, and conventional wisdom says it should tax more, as well.

We have pretty much given up on constitutional design as a restraint. The general welfare limits on federal spending are completely ignored, and the Supreme Court did not even mention them in its Obamacare decision.

Will an active and engaged citizenry reemerge, and will they be heard? In the end, American citizens are the only protection that really counts.

Notes
1.   Thomas Jefferson, “Paper to James Madison,” September 6, 1789, Founders’ Constitution 1, chap. 2, doc. 23 (The University of Chicago Press, 1987), http://press-pubs.uchicago.edu/founders/documents/v1ch2s23.html (accessed September 26, 2012).
2.   James Madison, “Paper to Thomas Jefferson,” February 4, 1790, Founders’ Constitution 1, chap. 2, doc. 24 (The University of Chicago Press, 1987), http://press-pubs.uchicago.edu/founders/documents/v1ch2s24.html (accessed September 26, 2012).
3.   Alexander Hamilton, The First Report on Public Credit, January 14, 1790 (Liberty Fund Inc.: Online Library of Liberty), http://oll.libertyfund.org/index.php?option=com_content&task=view&id=1058&Itemid=264 (accessed September 26, 2012).
4.   James Madison “Paper to Andrew Stevenson,” November 27, 1830, Founders’ Constitution 2, art. 1, sec. 8, cl. 1, doc. 27 (The University of Chicago Press, 1987), http://press-pubs.uchicago.edu/founders/documents/a1_8_1s27.html (accessed September 26, 2012).
5.   Alexander Hamilton, “Report on Manufactures,” December 5, 1797, Founders’ Constitution 2, art. 1, sec. 8, cl. 1, doc. 21 (The University of Chicago Press, 1987), http://press-pubs.uchicago.edu/founders/documents/a1_8_1s21.html (accessed September 26, 2012).
6.   James Madison, “Records of the Federal Convention,” September 14, 1787, Founders’ Constitution 3, art. 1, sec. 8, cl. 7, doc. 1 (The University of Chicago Press, 1987), http://press-pubs.uchicago.edu/founders/documents/a1_8_7s1.html (accessed September 26, 2012).
7.   Ibid.
8.   United States Senate, Committee on Appropriations, 1867–2008 (Washington, DC: US Government Printing Office, 2008), 3, http://www.gpo.gov/fdsys/pkg/CDOC-110sdoc14/pdf/CDOC-110sdoc14.pdf (accessed September 26, 2012).
9.   “An Act for the Establishment and Support of Lighthouses, Beacons, Buoys, and Public Piers,” in The Public Statutes at Large of the United States of America 1 (Boston: Charles C. Little and James Brown, 1845), 53–54
10.   National Federation of Independent Business, et al. v. Sebelius, Secretary of Health and Human Services, et al. 567 US (2012), 48, 52, and 50.
11.   Ibid., 51.
12.   Ibid., 59.

The Walter Berns Constitution Day Lecture Series

A scholar of political philosophy and constitutional law, Walter Berns has written extensively on issues of American government and its founding principles. He is the author of ten volumes and has published widely in professional and popular journals and America’s leading newspapers. He is the John M. Olin University Professor Emeritus at Georgetown University and served as a resident scholar at AEI. He has taught at Louisiana State University, Yale University, Cornell University, Colgate University, the University of Toronto, and the University of Chicago. He earned his master’s and doctorate degrees in political science at the University of Chicago. Berns served on the National Council on the Humanities from 1982 to 1988 and  the Council of Scholars in the Library of Congress from 1981 to 1985. He was also a delegate to the United Nations Commission on Human Rights. He was awarded the National Humanities Medal in 2005.

In September 2011, AEI president Arthur Brooks announced that henceforth the Program on American Citizenship’s annual Constitution Day celebration would be named in honor of Walter Berns in appreciation of his scholarly legacy in this field and his many years of contributing to the work of AEI.

 

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