The False “Family Analogy” Argument for a Balanced Budget Amendment

November 16, 2011 at 1:43 pm

Families must balance their budget every year, proponents of a constitutional balanced budget amendment often argue, so why shouldn’t the federal government?  This argument has several serious flaws, the most basic being that families often do not balance their budgets, for good reason.

A family that takes out a student loan to send a child to college, for example, might end up with a large “deficit” for that year — that is, it will spend more than it earns that year.  But a college education is a solid long-term investment that is likely to translate into significantly higher earnings over the child’s working career.

Similarly, a family that obtains a mortgage will almost certainly have a “deficit” for that year, but it will also have a house to live in.

Families also build up savings in good economic times and draw them down when times are tight to cover expenses that exceed their current incomes.

The proposed constitutional amendment would bar the federal government from such practices.  The federal government couldn’t borrow to finance investments that boost future economic growth, such as infrastructure improvements.  And if it ran a surplus one year, it couldn’t draw it down the next year to help balance the budget if the economy turned down.

In fact, even if a family financed a new house or a college education entirely out of savings – with no loans and no mortgage – that would still be prohibited “deficit financing” under the terms of the balanced budget amendment, because it is still a case of spending more in that year than the family earned in that year.

In short, a balanced budget amendment wouldn’t align federal budgeting practices with those of families.  It also would threaten serious economic harm, especially in recessions — and would harm family budgets by causing many Americans to lose their jobs, as Macroeconomic Advisers has explained.  It also would create a host of problems for Social Security, and other basic federal functions, as we’ve explained.

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More About Robert Greenstein

Robert Greenstein

Greenstein is the founder and President of the Center on Budget and Policy Priorities. You can follow him on Twitter @GreensteinCBPP.

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2 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. 1

    While I quite agree it’s a false analogy — and a false solution to the wrong problem — we do have a problem.

    Our spending and taxation are out of sync, we as voters have poor feedback on the spending, and we run permanent deficits that our children will have to pay for, like people stuck on a credit-card treadmill (note: I’m using the same analogy to demonstrate NOT balancing our budget. Hurray for tepid analogies!)

    My suggestion is, at its core, dead simple: Index taxes directly to expenditures. If Congress spends more, your tax rates go up, in synchrony with the expenditures.

    There are details to attend to. Right now, a lot of our expenditures are paid for right at the point of taxation. These “tax expenditures” are billed as “tax breaks”, and revoking them is then labelled a “tax increase” rather than a “spending cut”. Thus making spendthrift congressmen look like tax cutters — and anyone trying to stop the spending look like a taxing maniac.

    That stands the incentives right on their head. We need to ban these — and simplify the tax code in the process, as a side benefit

    But finally, we DO want to have the ability to engage in deficit spending. But if we are indexing tax rates, that becomes simple. We can, for example, limit the payoff period on our debt to 10 years. When Congress authorizes deficit spending, the interest and principle would automatically be added to the next 10 years’ taxes.

    Congress can still argue over who pays what taxes.

  2. 2

    Thank you so much for this post. I too have tried to call attention to this false analogy. To liken it to the current state of affairs — the Super Committee jockeying for the highest amount to cut — it kind of like our nation saying: “The kids are starving. You’ve been going without medications. The car is broke. Why don’t we make an extra mortgage payment?”



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