Why a balanced budget amendment is economic madness

A very bad idea is back. The idea is to amend the United States Constitution to mandate a balanced federal budget. Tax income and government spending will have to match from now on, so there will be no more credit card spending for which the nation’s children will have to pick up the tab.

That’s the populist refrain from the Republican Party’s 47 Senators, all of whom are co-sponsoring the plan. But a balanced budget amendment is terrible economics. It effectively means an end to counter-cyclical fiscal policy: when a recession strikes, the federal government would not be able to stimulate the economy by spending more. Instead, it must cut back at the same time householders and businesses are doing the same, making the recession worse. It could condemn the US to a perpetual recession, a depression even.

The ability to fight a recession with federal spending is crucial because there are so few alternative tools. Balanced budget rules are in place in most US states. In the most recent recession, enforced austerity at the state level cancelled out most of the economic stimulus introduced by Congress, and spending cuts continue to contribute to high unemployment.

As if the idea is not bad enough, the Republicans have laced their current proposal with more poisonous pills, such as a ban on spending more than 18 per cent of GDP – below the historical norm – and a provision that will make it harder to raise the national debt ceiling. They do allow automatic exemptions to a balanced budget for war spending, but not for economic firefighting. In other times, Congress would need an unlikely two-thirds majority to override the balanced budget rule.

As it is such terrible economics, the tendency has been to assume it cannot pass. It is hard, after all, to amend the Constitution. Even Republican leaders admit the idea is as much about political posturing as it is about seriously tackling the US’s long-term debt crisis. When they vote, as they must, to raise the federal government debt ceiling to avert a catastrophic default by the US, they want to be able to point to other measures to rein in spending.

I would very strongly warn against complacency. Grassroots organisations have been lined up to agitate in support of the plan; Republican governors, including at least two potential presidential candidates, have written in support in the past few days. It could easily become a touchstone issue for next year’s elections, with moderate Democrats not wanting to be seen as weak on cutting the deficit.

Also, a similar proposal came within a single vote of passing Congress in 1995, when public fears over the deficit were high but not nearly as high as they are today.

None of this is to argue that Congress does not need to bring the budget back into balance this economic cycle, or to tackle problems such as spiralling healthcare costs. But these huge, vital tasks require a subtlety and courage that hasn’t been on show this week.

Say no to blunt instruments.

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• AJS1959

  ‘Even Republican leaders admit the idea is as much about political posturing as it is about seriously tackling the US’s long-term debt crisis.’ well, well that’s a bit more honest although I have to say that it would do nothing for any respect voters might have for the politicians .. I though politics was the art of what was possible ?

• http://colinb-sciencebuzz.blogspot.com newsjunkie

  “Counter-cyclical” spending would make economic sense, provided the amounts borrowed were repaid when the good times return. But they never are – look at our own trend figures on national debt, which keep rising inexorably. As the cost of servicing that accrued debt continues to take a bigger and bigger bite out of tax income, then taxes rise inexorably, and Goverement, through chronic overtaxation, then becomes the agent of stagflation – consumers no longer have the after-tax disposable income with which to rescue their own economy. In short, the permanent living on tick, the pushing of debt onto the next government, to future generations has been going on for so long that we are fast running out of options to maintain spending and growth.

  You are right – the amendment is wishful thinking, and I for one do not pretend to have any solutions for a no-win predicament that has been building up for decades, if not centuries.

  But answer me this. Why in a lifetime of avidly reading the financial columns of newspapers did I read virtually nothing about national debt, except for one silly season item about an old boy who touchingly made a modest bequest in his will of a few pounds to help reduce it? Was there a conspiracy of silence to keep us ignorant of the increasingly parlous state of our economy, especially in the five or six years post 2001 when the previous Government “borrowed to invest”, leaving us with no reserves with which to cope with the Credit Crunch, bank bailouts etc? Does the media have a vested interest in a society – and Government – that spends as if there were no tomorrow – reaping the ad revenue dividend? Have financial columnists been self-censoring, knowing whcih side of their bread is buttered?

• http://pulse.yahoo.com/_YKPNQECPYKYYTUVYGPPSMTGY6E Brian

  “counter-cyclical fiscal policy” – the HALF-observed philosophy of the left-wingers who proclaim themselves to be Keynsians.

  If they believed in what Keynes said, we would hear them campaigning for governments to run budget SURPLUSES during boom years. Tell me, Mr. Foley, did you write a single article, or even a single paragraph, urging Gordon Brown to run a budget surplus in the boom years from 2001 to 2008? Hear the silence from the believer in an endless money tree!

  Perhaps the public will resort to “blunt instruments” because they have, through experience, learnt that “keynesian” policies – when applied by left-wing politicians usually get interpreted as deficits in good times and bad.

• barabu

  haha. Dumb idea.

• http://profiles.google.com/olly.nicolle Olivier Nicolle

  Sounds great, but if it relies on politicians to implement it ..

• AustKimball

  In Australian we used our budget surplus from the pre 2008 years (+ extra) to avoid the recession. the surplus is gone but there is a commitment from the Govt to return to surplus. They will fail as their budget does not factor in the looming 2nd wave crash but at least the intent is there