The inflation rate in the United States in June increased to 9.1 percent. The Fed has responded to higher inflation with higher interest rates that could push the economy into recession.
But, before we revisit the stagflation of the 1970s, U.S. citizens should learn from the experience of a country that has had success in whipping inflation. For three decades, Switzerland has held inflation well below 3 percent. In June, amid soaring global commodity prices, its inflation rate increased to 3.4 percent. In contrast to the United States, Switzerland is projected to return to stable prices and economic growth soon.
Since 1874, the Swiss have used the institutions of direct democracy, i.e., initiative and referendum, to impose fiscal discipline at all levels of government.
Switzerland enacted a balanced budget amendment in its constitution in 2001 through a referendum, with approval from 85 percent of voters. The rule requires the federal government to bring expenditures into balance with revenue in the near term. An expenditures cap limits the growth in federal spending to the economy’s long-term growth.
A “debt brake” is used to enforce this expenditures cap, mandating that federal spending must be reduced automatically when deficits and debt exceed certain limits. The “debt brake” allows Swiss citizens to impose fiscal discipline on their government rather than leaving those decisions to the discretion of elected representatives. The Swiss “debt brake” has been so successful in imposing fiscal discipline that it has been copied in other European countries and by the European Union.
In the United States, citizens have used the institutions of direct democracy to impose fiscal discipline at the subnational level for several centuries. The initiative and referendum have been used in many states, especially at the local level, to limit government spending, taxes and debt. Every state has enacted balanced budget rules and debt limits to constrain the fiscal decisions of elected officials. Since the tax revolt of the 1970s, citizens in many states have also used the initiative and referendum to enact tax and expenditure limits, imposing fiscal discipline. In states with strong tax and expenditure limits, such as Colorado’s TABOR Amendment, the tax and expenditure limits have proven effective. This year, for example, every Colorado family will receive a $1,500 tax rebate from TABOR surplus revenue.
The Constitution does not provide for initiative and referendum at the national level. But Article V of the Constitution gives citizens, through their state representatives as well as Congress, the power to propose amendments to the Constitution. Over the years, many resolutions calling for a balanced budget amendment have been proposed in Congress. Still, none of these resolutions has received the supermajority vote required for Congress to submit the proposed amendment to the state legislatures or the people for ratification. If citizens want to impose fiscal rules on the federal government, they can no longer leave budgetary decisions to the discretion of Congress.
The best prospect for an inflation-fighting fiscal responsibility amendment is an Article V amendment convention called for by the states. Several private organizations are now working with state representatives to pass resolutions calling for an Article V amendment convention to enact such an amendment.
They are also working with representatives in Congress to enact a resolution calling on Congress to call the convention now since Congressional Records report that 39 applications of the required 34 had been received in 1979. The stakes are high. The failure of Congress to impose fiscal discipline and the resulting stagflation is why the Founding Fathers gave the states and Congress the power to propose amendments to the Constitution.
An inflation-fighting amendment drafted by the states and ratified by the people could head off years of high inflation and unemployment. Citizens shouldn’t have to move to Switzerland, like Russian oligarchs, to escape stagflation.
