BEYOND THE NUMBERS
Why Balancing the Budget Over the Next Decade Isn’t the Right Goal
As the House and Senate consider their respective budget resolutions this week, a key point of debate will be whether balancing the budget over the decade is an essential goal. We don’t think it is. We agree with Alice Rivlin, a former director of both the Congressional Budget Office (CBO) and the Office of Management and Budget, who told the New York Times last week, “There’s nothing magic about exact balance. The really important thing is to keep the debt from growing faster than the economy.”
Rivlin’s focus on the debt ratio — the debt held by the public as a percent of gross domestic product (GDP) — is the soundest approach. The debt ratio should rise only during hard economic times or major emergencies and should decline during good times. That approach enables the government to combat recessions through tax cuts and spending increases (and to address rising economic hardship during bad times), while creating a presumption against policies that significantly increase the deficit during good times.
The debt ratio cannot rise forever without impairing future productivity growth and ultimately living standards. In a crisis, international credit markets might refuse to lend to the U.S. public or private sectors at a reasonable price. While no one knows precisely what “too high” means for the United States, a debt ratio that rises in both good times and bad will become increasingly problematic.
That’s why we think ensuring that the debt ratio does not rise during normal economic times is the minimum appropriate budget policy. The critical goal now is to stabilize the debt in the coming decade without hindering the economic recovery from the worst recession since the Great Depression.Click here for the full commentary.