Proponents of a balanced budget requirement for the U.S. Constitution sometimes argue that since nearly every state has to balance its budget, the federal government should do the same. This argument has two fatal flaws:
The federal balanced budget proposals before Congress would outlaw sensible budgeting practices that states’ balanced budget requirements permit. States must balance their annual operating budgets, but they can — and do — borrow to pay for capital projects like new roads or schools. States also can build up reserves during good economic times and draw on them in bad times, without counting the drawdown as new spending that unbalances the budget.Under the proposed federal balanced budget requirement, in contrast, policymakers would have to balance the total federal budget every year, including capital investments. They couldn’t borrow money to finance infrastructure improvements or other investments that would boost future economic growth. And if the federal government ran a surplus one year, it couldn’t use any of that surplus the next year to help balance the budget.
From the economy’s perspective, the fact that states have to balance their budgets even in recessions makes it even more important not to require the federal government to do the same. States’ balanced budget requirements force them to cut spending and/or raise taxes at the worst possible time: when the economy is weak and needs more public and private spending, not less. These measures help keep state budgets in balance, but they can also make downturns longer and deeper — and the current downturn is no exception.The federal government plays a more positive role in a downturn precisely because it doesn’t have to balance its budget. Federal revenues weaken during a downturn and spending on unemployment insurance and other social programs increases, causing deficits to expand; these “automatic stabilizers” offset part of the decline in spending, cushioning the impact of the downturn. Also, federal policymakers can enact stimulus measures to help shore up demand during a downturn, as Congress did in the 2009 Recovery Act.
A balanced budget requirement would cripple the automatic stabilizers and make meaningful stimulus measures impossible by forcing federal policymakers to cut spending and/or raise taxes when the economy has weakened, just as state policymakers already must do. That would set off a vicious spiral of bad economic and fiscal policy: a weak economy would lead to higher deficits, which would force more spending cuts or tax increases, which would weaken the economy further. As Congressional Budget Office head Douglas Elmendorf warned Congress, a balanced budget amendment “risks making the economy less stable, risks exacerbating the swings in business cycles.”
For some of the other reasons why a balanced budget amendment is a bad idea, see our recent report.