A Balanced Budget Requirement is a Very Bad Idea

I’ve argued on many occasions that one of the big lessons we need to learn from this recession is that state-level balanced budget requirements are highly destabililizing. When a recession hits, spending goes up for social services and taxes fall as income, sales, property values, and other sources of revenue for state and local governments decline.

The result is a big hole in state and local government budgets, and that forces either increases in taxes or cuts in spending. And though some state and local governments were an exception to this, far and away the choice is to cut spending. We can see this in the state and local government employment statistics:

That’s not what we want to have happening when we are trying to recover from a recession. It would be much better if states had rainy day funds to rely upon, and if the rainy day funds fall short, the federal government could backfill the budget holes to prevent the destabilizing downsizing.

So have we learned the lesson? Nope, at least not if you are a Republican. They’d like to impose the same destabilizing rules on the federal government:

House pursues balanced-budget bill; need for backup plan acknowledged, by Rosalind S. Helderman, Paul Kane and William Branigin, Washington Post: The Republican-controlled House defied a presidential veto threat and forged ahead Tuesday with a bill to amend the Constitution to require a balanced federal budget…

The House bill is an updated version of the kind of balanced-budget amendment that Republicans have coveted for years. …

They could put in an exception for recessions, there’s one for wars, but spending to combat the recession is a big part of what Republicans are ticked about. And an exception would likely be subject to a 2/3 rule anyway, so practically the exception wouldn’t help much.

How can a party that is so irresponsible with the nation’s economic matters — budget arsonists to a large degree — have a reputation for competence in this area?

About Mark Thoma 243 Articles

Affiliation: University of Oregon

Mark Thoma is a member of the Economics Department at the University of Oregon. He joined the UO faculty in 1987 and served as head of the Economics Department for five years. His research examines the effects that changes in monetary policy have on inflation, output, unemployment, interest rates and other macroeconomic variables with a focus on asymmetries in the response of these variables to policy changes, and on changes in the relationship between policy and the economy over time. He has also conducted research in other areas such as the relationship between the political party in power, and macroeconomic outcomes and using macroeconomic tools to predict transportation flows. He received his doctorate from Washington State University.

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