Against Balancing the Budget

2 months ago Alger Mag Editor 0

With the United States’ national debt nearing $20 trillion and the federal budget having run a deficit for nearly two decades, many policymakers are pursuing routes to improving federal fiscal responsibility. For many, a balanced budget amendment looks to be the best solution; such a policy would amend the United States Constitution to require the federal government to spend no more than it collects in taxes for any given year. National polls show that more than two-thirds of Americans are in favor of the federal government adopting a balanced budget amendment. Many policymakers, especially fiscal conservatives, are also in support; Iowa Senator Chuck Grassley, who refers to our current fiscal state as a “deep crisis”, believes it will bring “more fiscal responsibility to Congress”.  However appealing this option may seem, it is unlikely that a balanced budget amendment will be able to create fiscal responsibility without imposing significant costs on the national economy.

The primary reason many support a balanced budget requirement for the federal government is the threat that both the federal budget deficit and the mounting national debt pose to the country. The federal budget deficit has run, on average, at 3% of U.S. GDP since 1980; only a brief period of surplus from the mid-1990’s to the early 2000’s has broken the cycle of deficit spending. The U.S. national debt currently stands at about $20 trillion with another $10 trillion in unfunded liabilities, which works out to $1 million owed by every American family. According to balanced budget proponents, this is a recipe for disaster; they say that a high federal debt causes or worsens problems like inflation and unemployment. This argument has traction in some areas but not others. Every year the federal government runs a deficit, the amount of money it spent was higher than the amount it took in in taxes.

Running a budget deficit causes a shift in aggregate demand, or the total demand for all goods and services in the economy, resulting in a higher real GDP and price level. Holding all else constant, this results in a higher inflation rate but not a higher unemployment rate. Though a few economic phenomena can be traced to budget deficits and a high national debt, not every economic occurrence is tied to government deficits and debts. Additionally, not all economic results of budget deficits and debts make society worse off; GDP increases by greater rates under out-of-balance budgets, spurring economic growth and expansion. As for the national debt, the United States may hold a seemingly shocking amount of debt, but it is not so outlandish when shown as a percentage of GDP. Countries such as Japan have a debt-to-GDP ratio of over 226% while the United States’ debt-to-GDP ratio is only 71.8%; in fact, the United States has only the 36th highest debt-to-GDP ratio in the world, which is lower than that of many other industrialized countries. When compared to other world leaders, the United States’ debt problem is not of outstanding significance.

Another concern many wish to address with a balanced budget amendment is the inefficient and often harmful role the political process plays in determining fiscal policy decisions. Their argument is that while sound, growth-promoting economic policy requires a long-term outlook and fiscal restraint, political decision-making encourages a short-term outlook focusing on issues that drive election cycles rather than nurturing stable, sustainable growth. Because of this disconnect between what considerations are necessary in writing effective fiscal policy and what behavior is encouraged by policymakers, many believe a balanced budget amendment is needed as a structural change to remove damaging political aspects from federal budgeting.

However, this argument distorts the effects of these political influences on the national economy. Its main problem is that it seems to assume that all significant economic policy is formed by those bound by political obligations. However, federal monetary policy, which controls the money supply and interest rates, is controlled by the Federal Reserve, an unelected body.  In addition to the removal of monetary policy from political influence, fiscal policy architects in Congress and the White House are kept accountable by many apolitical institutions that perform unbiased analyses of fiscal proposals and advise policymakers on economic issues. Nonpartisan agencies such as the Congressional Budget Office and the Government Accountability Office perform objective analyses of government policies, and their recommendations strongly influence policymakers’ decisions.

Perhaps the most significant problem a balanced budget amendment poses is the power it takes away from the federal government to react to recessions and other economic problems. By requiring that taxes equal expenditures in any given year, taxes must be raised when expenditures go up unexpectedly, or expenditures must go down to keep the same level of taxation.This becomes a problem in the case of a recession. Many automatic stabilizers, or parts of the budget that act to dampen fluctuations in real GDP caused by recessions and other events, tend to take up larger portions of the budget during recessions.

Consider the case of Unemployment Insurance, which provides temporary income to those who have lost their jobs. Without a balanced budget requirement, Unemployment Insurance would increase its payouts to workers during a recession; this increase in income for those out of work helps to soften the decrease in aggregate demand experienced during a recession, reducing the recession’s severity and duration. However, during a recession with a balanced budget requirement in place either Unemployment Insurance would have to decrease payouts, or additional taxes would have to be collected to compensate Unemployment Insurance’s losses. Neither of these actions cushions the decrease in aggregate demand experienced during a recession; worse, either dipping payouts below their normal levels or increasing taxes would worsen the recession. In the presence of a balanced budget requirement, stabilizers fail to reduce the severity or duration of recessions. A balanced budget amendment defeats the purpose of automatic stabilizers and leaves the federal government with very few fiscal policy measures to combat recessions.

Some balanced budget proponents propose an alternate fiscal policy measure that, according to them, would be able to alleviate the economic damage caused by recessions without taking the government’s budget out of balance. This solution is called the “rainy-day fund”. It allocates part of a government’s annual budget to a type of savings account, where it is then kept until economic downturn demands its use. Proponents say governments can use these funds to keep automatic stabilizers supported in times of recession and provide stimulus money without needing to bring the budget out of balance.

However, there are several problems with this idea. First, to set money aside for a rainy-day fund means to not spend it on useful public goods such as education, fire departments, building projects, etc.  This results in a decrease in aggregate demand under normal conditions, which dampens economic growth. Second, state governments, the most common users of rainy-day funds, can rarely project accurately how much money is needed for a rainy-day fund to be worthwhile during a recession. States with rainy day funds have not saved nearly enough to combat recessions in the past; most states burned through their rainy day funds in the first months of the 2007-2009 recession. Though rainy day funds seem appealing as a way to keep both a balanced budget and as a means of combating recession, governments both with and without rainy-day funds are prone to the same central problem: recessions cannot be handled effectively by those unwilling to at least temporarily bring their budgets out of balance.

In conclusion, a balanced budget amendment to the U.S. Constitution would negatively affect the American economy. Its necessity is exaggerated, as the federal deficit, national debt, and political influences do not affect the national economy nearly as adversely as balanced budget proponents claim. Its only significant effect would be to inhibit the ability of federal fiscal policy to cushion the economic damage during recessions.  Furthermore, solutions to this problem, not involving removing the balanced budget mandate, have been proven not to work. Without clear benefits to the economy or an overarching necessity for it, a balanced budget amendment should not be adopted by the federal government of the United States.

Brandon Bryan