Thursday, August 13, 2009

Do We Need a Balanced Budget Amendment?



Many people are worried about the large deficits we’re running up. High deficits will lead to higher interest rates, and cause government borrowing to crowd out private borrowing they say. So is the solution to have a balanced budget amendment?

I think it’s an interesting idea. Such an amendment could have an exception for times of war or economic crisis. But the problem is defining what an economic crisis is. Surely, economists and politicians could well disagree on whether economic difficulties rise to the level of a “crisis.”

Balancing a budget in the middle of an economic crisis would be bad policy. During a recession, consumer spending and demand usually fall. To stimulate the economy, government could pursue any number of measures from tax cuts to infrastructure spending.

At the same time, it would be a mistake to cut entitlement spending for the most vulnerable members of society, or education spending. And the country could be in a foreign policy environment when it needs to retain a robust military presence. During recessions, tax expenditures often fall meaning that government would have less tax revenue to finance spending.

This all means that government is likely to run a budget deficit. And I think that’s the most important problem the amendment would run into. Making sure the government can run a deficit in a genuine emergency.

There is also a question of how the amendment would be enforced. If Congress were unable to agree on cuts, what would happen? Would the Supreme Court be forced to step in and raise taxes and cut programs? That’s certainly unappetizing.

But otherwise, an amendment makes lots of sense. Politicians will always be under pressure to provide more government services and cut taxes. The reason is that voters like government services and dislike taxes. So politicians’ incentive is to spend and cut taxes to get reelected. An amendment would provide a legal requirement for them to make the hard choices necessary to balance a budget.

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