• Balanced Budget Amendment is a Bad Idea

    David Leonhardt in Economix blog lays out nicely that while we very much need to address our long term fiscal imbalance, a balanced budget amendment is a terrible idea. We need to be able to run a deficit in times of emergency (war, economic), and indeed could sustain a small annual deficit in perpetuity. We have had a very large deficit the past few years due to the economic emergency, and we will have very large ones going forward even if the economy returns to normal primarily due to the joining of the demographic reality of the baby boomers with our nation’s generalized health care cost problem (Medicare), and the fact that our current tax receipts are far below our aggregate default spending levels.

    Two-thirds of the federal budget is comprised of 5 line items: Military, Social Security, Medicare, Medicaid and Interest on the debt.  If we extend our current tax code for another decade, then we will have deficit in 2020 even if we eradicate ALL federal spending other than these 5 line items.

    Over the long run, taxes will have to rise and spending will have to fall as compared to current default levels of both if we are to move toward a sustainable federal budget.

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    • Does anyone outside of the GOP echo chamber actually think a BBA is a good idea? I realize the political appeal of such simplistic proposals, but is there one (just one!) actual economist, public finance or policy wonk who thinks a BBA would be anything but an incredibly stupid thing to do?

    • Putting the budget on a sustainable course is relatively easy. Ending the Bush tax cuts would do most of the work. Combine that with ending our current wars and ending the current economic downturn and we’re in great fiscal shape. http://www.cbpp.org/images/cms//5-10-11bud-f1.jpg

      “due to the joining of the demographic reality of the baby boomers with our nation’s generalized health care cost problem (Medicare)”

      To be clear, the problem is our health care cost problem, not Medicare. It does me no good to pay $1,000 less in taxes but $1,500 more in healthcare costs (the CBO says moving away from Medicare increases national healthcare spending by a lot).

      @Justin – is that a rhetorical question? I’ve yet to see a responsible economist who thinks the BBA would be anything other than stupid.

      • @foosion
        You are correct we need to slow rate of growth in health care costs, generally. Medicare simply brings health care costs to the federal budget. If we slow health costs it means less care and/or less pay for care per capita, as compared to default case. Of course this blog has written ad nauseum on this

    • While David Leonhardt makes the case for keeping the deficit below GDP growth instead of a zero deficit, it is difficult to create a budget amendment to enact something that complicated. It’s clear that our leaders are not responsible enough to hold the purse strings.

      For the long term, can’t we agree that we need some kind of device to ensure that deficits are below GDP growth (when the economy is growing)? We should not be adding debt no matter the state of the economy. Secondly, all of the proposed BBAs have a safety valve that allows deficit spending in case of emergency.

      For those opposed to any kind of BBA, do you believe there’s any kind of structural problem with the budget process, and how do you propose to fix it?

      • @Jeremy N
        The public is roughly delusional, wanting low taxes and high spending. Politiicans respond to incentives. I favor good policy. BBA is terrible policy. A specific target level of GDP to aim for in balance in long run would be useful, like the 21% proposed in the Chairman’s mark of the Fiscal Commission. A cap on tax revenue as % of GDP at a plausible level like the 21% might make sense. Then the policy debate would be about getting balance at 21% GDP or running a sustainable deficit in perpetuity, the definition of what is sustainable would be open to debate. I think 1% GDP more like it instead of the 3% some toss around.

    • Several years ago in British Columbia, Canada the left-leaning New Democratic Party was defeated by the so-called Liberal Party. (Notwithstanding their name, they are actually a very conservative “free enterprise” type party.)

      One of the first pieces of legislation passed by this new government was a balanced budget law — implemented to prevent them ‘free spending socialist types’ from deficit financing. That all worked well while the economy was doing well. But last year after the provinical economy tanked as the US recession finally caught up to us, that very same government passed a new law allowing them to ignore the previous law for 2 years.

      If a BBA is passed in the US, it will be by the Republican Party. And the first administration to attempt to override that BBA will be a Republican administration. George W Bush (and probably even Ronald Reagan) would likely have attempted to get around the BBA in the early days of their administrations.

      It’s all smoke and mirrors.

    • The Federal gov’t borrows about $.40 for every dollar spent. If for no other reason the BBA is a bad idea because Congress (regardless of which party is in charge) will simply raise taxes to cover whatever amount they wish to spend over what they have. If it requires taking 100% of everything we have that is what they will do. There certainly isn’t any way they are going to cut the budget 40%.

      It appears to me that our choice is this: we chose either

      1 – Dive head first into the pool of Socialism where we confiscate all production (industrial and agricultural) and all wages over a certain amount (say $100,000/yr). Then redistribute what is collected in the form of checks, health care, food stamps (which are not worth money, but rather worth a certain amount of milk, bread, lettuce, oranges, etc.) and the like.

      2 – or, we get our toes out of the pool of Socialism (Welfare, Medicade, Social Security, Medicare, and any other gov’t program that takes money from one citizen and gives it to another for them to live on) and return to the free market system where we are all responsible for ourselves.

      As far as I can tell, there aren’t any politicians talking about option number 2. They are all talking about various shades of option number 1.