Debt Brake

All this talk of cut, cap, and balance among Republicans sounds nice, but as a policy matter, the balanced budget amendment seems like a bad idea. There are perfectly legitimate reasons to run deficits much of the time, particularly when the economy is weak. Requiring a 2/3 majority of congress to do so runs the risk of bad economic management during the next downturn. The BBA has no chance of actually becoming law, but there is a more flexible policy option out there that the GOP should consider, one that has worked quite well in Switzerland.

In the early 2000s Switzerland adopted a constitutional “debt brake” in response to a decade of surging deficits and economic weakness. The policy sets a spending rule based on economic performance and penalizes spending above that rule in an adjustment account that must be balance across an economic cycle.

In other words, the spending rule allows for deficits to boost demand during downturns but then requires surpluses when the economy is stronger. It’s worked beautifully for Switzerland, which has had declines in debt-to-GDP ratio over the past ten years. In fact, it’s quite popular in Switzerland, where more than 90% of voters reaffirmed the measure in a recent referendum. Two years ago, Germany adopted a similar measure as well.

What works for Switzerland and Germany may not work here. The United States has military responsibilities and other spending requirements that far exceed those western European states. And American bureaucrats may be more willing or adept at circumventing the rules than their counterparts in Switzerland or Germany.

Yet both of these problems would affect a BBA as well. For serious BBA advocates, the debt brake seems like a better option because it wouldn’t force spending cuts at times when the economy is already quite weak. Instead, it would add a countercyclical dimension to the spending rule, such that the budget was in balance over a complete economic cycle rather than every individual year.

For many republicans, the BBA vote is just a political toy. They don’t much care if the policy is unworkable because they never intend it to pass. For those who are more serious about deficit reduction, the Swiss model would be worth a look.