Our nation has experienced debt fatigue, allowing debt to increase more rapidly than our national income.
Total federal debt is now more than 120% of national income, a record, and increasing rapidly. When unfunded social insurance obligations are included, the total rises to about 440% of GDP, growing faster than the economy. The accumulation of debt and unfunded obligations associated with federal social insurance programs exposes the country to an increasing risk of a fiscal crisis and threatens the long-term viability of Social Security and Medicare.
As the “trust funds” associated with Social Security and Medicare become exhausted, future generations face the possibility of paying higher taxes and receiving less benefits.
Walker
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The fatal flaw in federal fiscal policy is a commitment problem. The U.S. Constitution does not include any constraints on fiscal policy. Congress relies on statutory fiscal rules that are frequently modified, circumscribed, and suspended. As a result, a commitment to fiscal responsibility by one Congress is not binding on a later Congress. Economists refer to this as the time inconsistency problem.
In contrast to the federal government, state and local governments have been more successful in maintaining sustainable debt levels. Total state and local debt today is equal to 13 percent of national income, about the same level as three decades ago.
Clearly state and local governments have had much greater success than the federal government in constraining their debt to sustainable levels. They have solved the commitment problem by incorporating effective fiscal rules in their Constitutions and statues.
Unfortunately, West Virginia is somewhat of an exception that proves the need for tough rules. West Virginia has one of the highest debt burdens relative to state income in the nation at close to 20 percent. The debt burden in West Virginia exposes the state to a high risk of debt default and should be reduced over time.
It is not surprising that West Virginia has weak fiscal rules compared to other states. There is no constitutional or statutory limit on total state debt, leaving debt issue to the discretion of the legislature. However, voter approval is required for the state to issue general obligation bonds.
Other fiscal rules in West Virginia are weak as well. The legislature must pass a balanced budget, but there is no restriction on deficits carried over from one fiscal year to the next. The Legislature can enact tax and revenue increases with a simple majority vote. The Governor has line-item veto authority, but a veto can be overridden by the Legislature with a simple majority vote. The state rainy day fund is simply money transferred from the Tobacco Medical Trust Fund.
The relatively high debt burden in West Virginia has created a less favorable business climate. West Virginia is at a disadvantage in attracting investment and jobs compare to other states with sustainable debt burdens. Other states have stringent constitutional and statutory fiscal rules imposing constraints on fiscal policy and have stabilized their debt at sustainable levels. West Virginia leaders and citizens must up their game to restore fiscal sanity and compete with other states.
There are several lessons that the federal government can learn from the experience with fiscal rules in West Virginia and other states. Incorporating fiscal rules in the Constitution can prevent legislators from behaving in a fiscally irresponsible manner. If legislators fail to balance the budget and stabilize debt, they face the wrath of citizens who voted to incorporate the fiscal rules in their Constitution. Citizens then have recourse through the legal system to enforce the Constitutional fiscal rules.
West Virginia legislators and citizens have the power under Article V of the U.S. Constitution to address federal fiscal irresponsibility as well. Two thirds of the states (34 states) can call a convention of states to propose fiscal restraints on the federal government. Any resulting fiscal responsibility amendment proposed by a convention must be submitted for ratification by three quarters of the states (38 states), preferably by a vote of the people as was the case with the 21st Amendment.
West Virginia submitted a plenary application for an Article V Convention in 1975. West Virginia reaffirmed its support for a convention of states under Article V to propose a fiscal responsibility amendment by submitting a new application in 2015. Recent research discovered that more than the required number of states called for such a convention of states in 1979 and yet Congress has failed to act.
Legislation introduced in Congress this year (H.C.R. 24) would require Congress to fulfill its obligation under Article V of the Constitution to certify and count state resolutions and call the convention. Non-profit organizations are now working with state legislators in West Virginia and other states in an appeal to the Supreme Court for a Declaratory Judgement that would require Congress to record and count the applications. West Virginia and other states must now step up and demand that Congress set the time and place for such a convention as required under Article V.
In West Virginia, the time for action is now, "trust but verify!"
Poulson is on the Board of Directors of the Federal Fiscal Sustainability Foundation. Walker is the immediate former comptroller general of the United States.
