Saturday, August 13, 2011

The Foolishness of a Balanced Budget Amendment

One of the popular bad ideas among Conservatives and Teabaggers is the idea of a balanced budget amendment.  There are numerous reasons why this is a tragically stupid idea, but this is the best example of why this must never happen.
[I]magine that this constitutional amendment was in place and that federal spending was roughly at its limit relative to the size of the economy. And then the financial sector blows up again – either through no fault of its own (which is the current prevailing myth on Wall Street about 2007-09, believe or not) or because of some toxic combination of malfeasance and malpractice (the predominant view among many other people).

The blame game is irrelevant when GDP drops 10 percent; the issue is how to prevent a Great Depression. But after the GDP decline, the same level of nominal spending is no longer 18 percent of GD but suddenly 20 percent (check the math for yourself) and now there is a constitutional crisis to confront — before we get to the question of whether any tax cuts or other forms of stimulus might be appropriate. It makes no sense to target, as a matter of constitutional process, two numbers that are both outcomes of deeper economic processes.

And, to be frank, sometimes it makes a great of sense to apply an economic stimulus to an economy in freefall. One such moment was 1930 (and 1931 and 1932), when no stimulus was applied. Other moments were 2008 and 2009; both President Bush and President Obama initiated stimulus packages. When credit for and confidence in the private sector evaporates, do you really want the government sector to be forced to make quick cuts – or raise taxes?

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