As the federal government lurches toward a fiscal cliff, the states are saying enough is enough. We must not experience a fiscal crisis to end this fiscal profligacy. The states have experienced debt default and have learned how to avoid it, and they are now demanding that the federal government do likewise.
During the Andrew Jacksonian period in the early 19th century, many states defaulted on debt. They incurred debt to finance internal improvements such as canals and railroads. Many of these projects were white elephants that depended on public subsidies. When the states could not service the debt, they were bankrupt.
The states, having experienced bankruptcy, enacted fiscal rules in their constitutions and statutes to prevent future defaults. These rules included balanced budget requirements, debt limits, tax and expenditure limit rainy day funds, and veto authority. The fiscal rules were effective in constraining state taxes and spending and in stabilizing debt burdens. Over the years, the ratio of state debt to state gross product grew, but it has stabilized at 13 percent in recent years. With a few exceptions, the states are no longer exposed to the risk of default on their debt.
Unfortunately, the federal government is now exposed to a high risk of debt. The ratio of total federal debt to gross national product has increased to 130 percent. It is projected to increase to more than 200 percent by midcentury. Bond rating agencies have downgraded U.S. securities, and the U.S. must now pay much higher interest rates on these securities to attract buyers for the massive amounts of new debt placed in capital markets. Interest on the public debt is now one of the fastest-growing components in the federal budget.
Fiscal discipline at the federal level has become more urgent because of the effect of unconstrained growth in federal spending on the states. The growth in federal spending on programs such as Medicaid has been accompanied by new mandates for spending by the states. With an expansion in eligibility and benefits, these programs are absorbing large and growing shares of state budgets. The conflict over welfare spending is especially fierce because many states have been successful in reforming welfare programs to reduce costs. Federal mandates undermine these hard-fought battles in the states to balance their budgets and stabilize debt.
The fatal flaw in this conflict is the absence of fiscal rules in the Constitution. From the very outset of the republic, the Founding Fathers recognized this flaw. Thomas Jefferson stated that if there was one thing he would change in the Constitution, it would be to prohibit federal debt. Congress must rely on statutory fiscal rules that are routinely circumvented and suspended.
States recognized this flaw in the Constitution early. Beginning with the Virginia application in 1788, states have submitted resolutions to Congress calling for an amendment convention under Article V. When federal debt began to grow at an unsustainable rate after World War II, many states submitted resolutions calling for a fiscal responsibility amendment to the Constitution.
Recent research discovered that more than the required number of states called for such a convention of states in 1979, and yet Congress failed to act. Legislation introduced in Congress this year would require Congress to fulfill its obligation under Article V of the Constitution to certify and count state resolutions and call the convention.
The states and the federal government have reached an impasse over Article V. This is precisely what the Founding Fathers anticipated when they incorporated Article V in the Constitution to give the states and Congress equal rights in proposing amendments. In our federal system, when the states and Congress reach such an impasse, it is up to the Supreme Court to perform its role in resolving the conflict.
State leaders and citizens are no longer willing to wait for the federal government to get its fiscal house in order. Private non-profit organizations are now working with state legislators in an appeal to the Supreme Court for a declaratory judgment that would require Congress to record and count these applications. It is unsurprising that states such as Utah and Arizona, which have pursued prudent fiscal policies, are leading this effort.
Legislators on both sides agree that the nation faces a debt crisis, but Congress has failed to act. A fiscal responsibility amendment enacted through an Article V amendment convention is now the only recourse that citizens have to prevent the country from going over a fiscal cliff. It is time for the states to step up and demand that Congress set the time and place for such a convention as required under Article V.
