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.Tagged in: balanced budget amendment, budget, constitutional amendment, deficit, republicans
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