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Balanced Budget Amendment = Bad News for the Economy

November 8, 2011 at 2:25 PM
Richard Kogan

With the House planning to vote next week on a constitutional balanced budget amendment (BBA), we’ve issued a brief paper highlighting a scathing analysis of a BBA from Macroeconomic Advisers, a leading private economic forecasting firm.

“[R]ecessions would be deeper and longer” under a BBA, the analysis warns, and uncertainty would be cast over the economy that could retard economic growth even in normal economic times.

Below are some excerpts from the Macroeconomic Advisers analysis:

  • “Suppose in 2008, when the deficit seemed manageable, a BBA had been sent by Congress to the states, that it was ratified this fall, and enforced for FY 2012.  The effect on the economy would be catastrophic.”

    If the 2012 budget were balanced through spending cuts, those cuts would total about $1.5 trillion in 2012 alone, the analysis estimates.  Those cuts would throw about 15 million more people out of work, double the unemployment rate from 9 percent to approximately 18 percent, and cause the economy to shrink by about 17 percent instead of growing by an expected 2 percent.

  • “The pall of uncertainty cast over the economy if it appeared a BBA could be ratified and enforced in the middle of recession or when the deficit was still large would have a chilling effect on near-term economic growth.”

  • “[T]he only way to implement a BBA without some fiscal drag is to ratify it when the budget is in balance or surplus.  Of course, then we wouldn’t have needed the BBA to achieve balance in the first place.”
  • “Suppose the BBA was implemented when the budget already was in balance.  There still would be new and powerful uncertainties in play.  The economy’s ‘automatic stabilizers’ would be eviscerated [and] discretionary counter-cyclical fiscal policy would be unconstitutional. . . .  Recessions would be deeper and longer.”

Our own reports have described the economic damage and other problems that a BBA could cause and outlined the massive spending cuts required under a particularly extreme version of the BBA, which would cap federal spending at 18 percent of gross domestic product.

We’ll write more about the BBA in the coming days.

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