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5 Reasons Why the House Balanced Budget Amendment Is a Bad Idea

April 11, 2018 at 10:00 AM

House Judiciary Committee Chair Bob Goodlatte’s proposed constitutional amendment requiring a balanced budget, which the House will vote on tomorrow, has many serious drawbacks:

  • It would hurt the economy.  By requiring a balanced budget every year, no matter the state of the economy, the balanced budget amendment (BBA) proposal would risk tipping a weak economy into recession and making recessions more frequent, longer, and deeper, causing very large job losses and hurting long-term growth.  That’s because it would force policymakers to cut spending or raise taxes just when the economy is weak or already in recession — the opposite of good economic policy.

    Before 1929, the budget was balanced or close to it in most years (except during major wars), while from 1933 on, the federal government fought recessions by allowing deficits to grow when the economy was weak and then shrink as it recovered.  The latter approach worked better, with fewer recessions, longer expansions, and better growth, as the table shows:

      “Balanced budget” period (1854-1929) “Fight recessions” period (1929-2017)
    Average number of recessions per decade 2.8 1.6
    Average length of economic expansions 25 months 63 months
    Average annual real economic growth per person 1.4% 2.0%

    Policymakers don’t need to balance the budget every year to put the budget on a sustainable path.  Even with modest-sized deficits, it’s possible to stabilize or reduce the debt as a share of gross domestic product, which is the best measure of sustainability over the long run.

  • It would undercut Social Security, Medicare, and other programs that have built up reserves.  The BBA prohibits Social Security, Medicare Part A, the Federal Deposit Insurance Corporation, the military and civil service retirement funds, and other funds from using their accumulated reserves.  That’s because the BBA prohibits spending from exceeding the revenues collected in that year.  For example, Social Security couldn’t use the $2.9 trillion in Treasury securities it holds to help pay benefits to retired baby boomers since almost all of it was collected in prior years.
  • It’s much stricter than state balanced-budget requirements.  While states must balance their operating budgets, states can and do borrow to finance capital projects such as roads, schools, or water treatment plants.  The BBA, in contrast, prohibits all federal borrowing.  States also can build “rainy day” reserves during good times and draw on them in bad times without counting the drawdown as new spending that unbalances a budget.  The BBA would prohibit the federal government from doing so because it prohibits spending from exceeding revenues collected in that year, as noted above.
  • It’s also much stricter than constraints on families.  Prudent families balance their checkbooks but not their budgets, because that would mean no borrowing: no mortgages, no student loans, no dealer-financed cars.  And even a family with enough wealth that it never had to borrow might use its savings or inheritance to buy a house or pay for college.
  • It’s silent on the critical question of who would enforce it. If Congress couldn’t balance the budget, could the President cut programs or raise taxes unilaterally?  Could the courts?  No one knows.

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