Thursday, August 18, 2011

The Case Against a Balanced Budget Amendment

The recent debt ceiling “crisis” in Washington focused a great deal of attention on our national debt. Currently the United States owes a debt of more than $14,000,000,000,000, a number so staggering it defies understanding. America has maintained a self-imposed limit on borrowing (the “debt ceiling”) which, because it is self-imposed, we have increased dozens of times over the years.
One idea thrown into the debate over the most recent increase to the debt ceiling was the so called “cut, cap and balance” proposal. The general idea was that the increase in the debt ceiling would be linked to an amendment to the U.S. Constitution requiring a balanced budget. The proposal passed the House but was defeated by the Senate. Which led many commentators and politicians to wonder who could possibly oppose a balanced budget amendment? The answer is really anyone with even a basic understanding of economics, as I will attempt to explain.
A balanced budget amendment has problems of both a political and economic nature. Politically, it is a “pass the buck” move by current politicians who want to look like they are taking responsibility without actually having to take responsibility. The amendment does not specify HOW the budget will be balanced. Someone else will have to decide, for example, whether to slash defense spending or social security benefits, or raise taxes. The favorite metaphor used by supporters of the balanced budget amendment is that American families have to live within their means so the government should, too. (Note: this overlooks the large amount of debts Americans incur for housing, cars, etc., but that is another issue). Well, supporting a balanced budget amendment is the equivalent of the head of that household looking at the income and expenses and saying “I have solved our budget problem, from now on we will not spend more than we earn,” without providing any explanation of how the family will accomplish this goal. Someone else will have to decide what bills don’t get paid.
Economically it is a bad idea to require a balanced budget because governments are not just like a household. Rather, we have decided that the government plays an important role in providing a safety net for society. When the economy stumbles, as it has recently, the government takes in less in taxes but there is a greater need for government spending. A balanced budget amendment would, therefore, require the government to either raise taxes or cut benefits, or both, during a recession thereby making the recession worse. The problem also happens in reverse if there is an economic boom. The government takes in more taxes and spends less on social programs, meaning there is excess revenue.  Economic booms lead to higher prices, known as inflation, because the increase in economic activity creates wealth faster than it creates goods – people doing well spend more money. A balanced budget amendment would require the government to cut taxes or increase spending during a boom, which would fuel even higher inflation. In other words, a balanced budget amendment forces the government to take the exact opposite action appropriate for the economy in either a surplus or deficit situation.
The current debt is drastically too high, and there should be broad consensus to cut that debt. But a balanced budget amendment is absolutely the wrong way to go about it. If you still don’t believe me I will offer this final thought. Herbert Hoover was known as the “great humanitarian” for his work in Europe after World War I. He coordinated private relief efforts for the war torn continent. But he steadfastly believed government could not spend more than it earned – he was wed to the idea of a balanced budget. When the stock market collapsed during his presidency he did not use the resources of the government because it required deficit spending. As the economy sank into the Great Depression his reputation as a humanitarian sank with it. In fact, the shanty towns that sprung up for the homeless and downtrodden earned another nickname in honor of the President, “Hoovervilles.”

5 Comments:

At August 19, 2011 at 11:08 AM , Anonymous Anonymous said...

I heard someone say (on NPR) that we have to find a way to stimulate growth in our economy. I recall the government awarded a major contract for military planes to a French company over an American one. Seems to me investing in the economy would be a start. You're the economist...what do you think?

 
At August 19, 2011 at 1:53 PM , Anonymous Professour Seamus said...

The military contracts issue is always messy - it seems perfectly reasonable to expect the US military to rely exclusively on US companies for equipment. But, of course, we want to supply military equipment to other countries, and we don't like overpaying for military equipment (remember the $500 toilet seat?). So we want foreign companies to bid on our projects as a competitive check, it would just be easier if American companies one the bidding.
Last I heard, although I haven't checked for a while, I thought that, as the result of litigation, the latest contract was pulled from Aerbus and awarded to Boeing. Meaning the American company eventually won (although foreign parts and assembly will still be heaviliy involved).
Obviously it is better for our economy to have the injection of cash made domestically.

Seamus

 
At August 19, 2011 at 2:45 PM , Anonymous Professor Seamus said...

Umm, typo alert. Make that, it would be easier if American companies "WON" the bidding.

 
At August 20, 2011 at 5:29 PM , Anonymous Anonymous said...

Just think it is a little sad. America won't bail itself out. We want it all cheaper. Therefore, everything is made in China. "Made in the USA" is so rarely seen...it's like finding treasure!

 
At August 21, 2011 at 9:40 PM , Anonymous Anonymous said...

Dear PS.

A more lucid 678 words on the economic perils of the United States have yet to be penned. But, even granting great grace for the unintended typo, I find I must pick a bone or two with your reasoning.

You brashly state, "The current debt is drastically too high..." Really? At an austere $14,000,000,000,000 it is rather easy to do the math. With a July, 2009, reported population of 307,006,550, the average American owes a mere $45,601.63. Is this really a problem? Please consider that there also exist a vast number of non-average Americans, each of whom also owe $45,601.63. It seems a rather simple fix: restrict school lunches (thereby also fighting the obesity epidemic), eliminate sports programs (thereby eliminating the cost of medical care for sports injuries), and lengthen summer vacations to four months (thereby allowing children above the age of six to easily triple their contribution to debt reduction through summer employment).

I hope I now have your full attention.

You derisively state, "The amendment does not specify HOW the budget will be balanced. Someone else will have to decide..." This is a problem? It seems to me you are castigating the American Way, the great concept of freedom upon which this country was established. I'm not sure it's in the constitution, but it certainly should be. What is, after all, more freeing than pinning the blame on the other guy? Isn't that the essence of American politics. So, PS, I'd strongly recommend you pay a bit more respect to our centuries-old political traditions before you espouse such radical positions as "being against a balanced budget amendment."

Honestly, it'd be a shame, Seamus, for you to get a rap as a being serious thinker, when that is so retro-political.

Your biggest fan,

talcolm

 

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