Sunday, July 10, 2011

Yes, the US Needs Budget Rules, but Not Hatch-Lee

Sometimes the United States is slow to join a global trend. Fiscal policy rules are a case in point. Economists love the idea of rules that decouple tax and spending policies from short-term politics and focus instead on long-term growth and sustainability. Such rules used to be rare; as recently as 1990, they were in effect in only 7 countries, according to an IMF survey. By 2009, the number had grown to 90. Aside from failed attempts like the Gramm-Rudman-Hollings Act of 1985, the United States has been missing from the list.

It won't be missing for long if Utah Senators Orin Hatch and Mike Lee have their way. They are pushing a set of budget rules in their Hatch-Lee Balanced Budget Amendment, which was introduced on March 31 with the backing of the entire Senate Republican delegation. Just this week, Senator Lee gave it added momentum by including it in his Cap, Cut and Balance Act. That new proposal would require the Hatch-Lee amendment to be passed, along with a set of short-term cuts and caps, before the debt ceiling could be raised.

Linking long-term rules to a short-term increase in the budget ceiling is an excellent idea. The IMF cites several examples, from Sweden to Bulgaria to New Zealand, where a fiscal crisis provided the impetus for the adoption of successful budget rules. But is Hatch-Lee the right kind of rule? Unfortunately it is not.

Follow this link to read the full post on Ed Dolan's Econ Blog at


  1. I'd love to see descriptions of some of these other mechanisms. Or links to good summaries. Eg, Sweden's social security system.

  2. OK, Dave, they're coming. I'll be posting soon on Sweden's rule of balancing over the cycle and Chile's targeting of the cyclical balance. The post will explain why the two are different, even though they sound the same. Meanwhile, you can read the IMF document I cited, if you don't mind the limitations of IMF prose.