Many of the Republican candidates, Tea Party leaders, and others on the right have come out in favor of a balanced budget amendment (BBA) to the Constitution. Michele Bachmann, for example, last month voted in favor of House Joint Resolution 2, calling for a BBA that requires total federal outlays in a fiscal year not to exceed federal revenues unless both the House and the Senate pass a resolution by a three-fifths margin to ignore that requirement.
The ability to override the amendment with a three-fifths majority removes much of its power, because when push comes to shove, most Representatives and Senators would vote to override the amendment rather than face potentially draconian spending cuts that could affect their own constituents.
More importantly, a balanced budget amendment is bad economic policy.
Comparing the federal government budget to a household's budget is misguided. A sovereign nation has the power to tax and to create money. Moreover, the U.S. is able to borrow money from foreign investors at historically low interest rates. Investors are willing to give the government money now in exchange for an implicit agreement by the government to tax its citizens in the future at a rate sufficient to repay the debt. On the other hand, if a household spends more than it takes in, it must borrow money, typically at high interest rates if it uses credit cards. The only way the household can pay off the debt is if it increases its earnings in the future, yet for most people wages grow only modestly over time. Therefore, there is a firm limit, often zero, to how much a household can borrow at any given time. Households cannot spend much more than they take in -- rational investors only extend credit to the extent that they are confident in being repaid. Governments have taxing authority; individuals do not.
Tax revenues flowing into the government's coffers are procyclical, meaning that they are higher when the economy is doing well and lower when the economy is doing poorly. During economic expansions, corporate profits and hence taxes are higher; investors record capital gains and hence pay capital gains taxes; and more people are employed for longer hours, so wage-based tax revenues are higher. During recessions, the opposite is true, and tax revenues are therefore lower.
Government spending is countercyclical, meaning that spending is higher when the economy is weak and lower when the economy is stronger. During a recession, more people become unemployed; and government spending, in the form of unemployment insurance payments, increases. More people become eligible for food assistance programs as the economy weakens, driving up those costs as well. To the extent that federal transfers help fund states' Medicaid programs, spending increases because more people are eligible for Medicaid payments. Whether unemployment benefits should extend more than six months, whether 99 weeks of benefits deter people from actively searching for work, how generous our food stamp program should be, etc., are all legitimate policy questions to ask. But the fact is that federal spending on those types of programs increases when the economy and labor market are weak.
So government revenue is procyclical while spending is countercyclical. Do you see a problem here? When the economy is at its weakest, government spending is higher and government revenue is lower. When the economy is booming, government spending is lower than it would otherwise be, while government revenue is higher.
Forcing the government to cut back spending when the economy is weak, as a BBA would require, is therefore a bad idea. Whether the Keynesian government spending multiplier is larger than one or smaller than one is a good, difficult question to answer that I may address later. But the vast majority of economists agree it is positive. The spending cuts that would be required by a BBA would cause the economy to be even weaker than it would otherwise be during a recession!
In short, with a BBA recessions would become more severe than they otherwise would be. They would force government spending to shrink at precisely the wrong time.
A balanced budget amendment makes for good campaign rhetoric but not good economic policy.
No comments:
Post a Comment