This week in the continuing saga of the debt ceiling, the House will be voting on a Republican proposal to make raising the debt ceiling contingent on the passage of a balanced budget amendment to the Constitution. This measure is expected to pass the House where it will be dead on arrival in the Senate. That’s a good thing because, although a balanced budget amendment is a good talking point, it’s horrible policy - particularly the specific one under consideration.
In general, a balanced budget amendment is bad policy because it takes away an important tool the government can use to regulate the economy. During a recession, revenues plummet as fewer taxes are collected due to increased unemployment. At the same time, expenditures increase as the government pays for unemployment insurance, Medicaid and other spending. Furthermore, the government is likely to increase spending or enact temporary tax cuts to stimulate the economy and hopefully bring the country out of the recession. Combining reduced revenue with increased spending is going to lead to at least a short term deficit, something a balanced budget amendment would not allow. With a balanced budget amendment in place, the government would have to reduce spending during a recession in order to match the reduced revenue. This would have the effect of withdrawing government support just when Americans need it most. It would also make the recession last longer and be even more devastating. Obviously excessively large, long-term deficits are a bad thing, but short-term deficits are perfectly appropriate during a recession.
Not only are balanced budget amendments bad policies, but the specific one House Republicans are considering is particularly problematic. This amendment would require a two-thirds majority in both houses of congress to raise taxes, which would actually make it MORE difficult to balance the budget. It caps spending at 18% of the previous year’s GDP versus the 21% that it has averaged in recent years. That may not sound like a big difference, but 3% of total GDP is a huge number, something like half a trillion dollars or more. To put it in perspective, every single budget year of the Reagan administration would be ruled unconstitutional under this amendment. In fact, the Ryan budget, with its dramatic cuts to domestic spending and restructuring of Medicare, would also violate this amendment. That’s how unworkable and unrealistic this version of the balanced budget amendment is.
Top result when searching "Political Theater"A balanced budget amendment is one of those policies that sound good on paper. It’s something that’s very difficult to argue against in simple terms. In his most recent press conference, President Obama opposed a balanced budget amendment by saying “we don't need a constitutional amendment to do our jobs”. While I agree with him, I don’t think it’s an argument many people will find persuasive. It’s much more difficult to tell Americans that sometimes deficits are ok, even though it’s true. This is all irrelevant because, as I said before, there is no chance that this balanced budget amendment will pass. But it’s sad and frustrating that valuable time is being wasted on the political theater that is this awful piece of legislation.
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Keith Doughty is a non-profit finance professional who in his spare time dabbles in music, politics, and interesting food. He lives and works in Philadelphia, PA.