The Misguided “States Do It” Argument for a Balanced Budget Amendment

July 13, 2011 at 1:48 pm

Proponents of a balanced budget requirement for the U.S. Constitution sometimes argue that since nearly every state has to balance its budget, the federal government should do the same.  This argument has two fatal flaws:

  • The federal balanced budget proposals before Congress would outlaw sensible budgeting practices that states’ balanced budget requirements permit. States must balance their annual operating budgets, but they can — and do — borrow to pay for capital projects like new roads or schools.  States also can build up reserves during good economic times and draw on them in bad times, without counting the drawdown as new spending that unbalances the budget.Under the proposed federal balanced budget requirement, in contrast, policymakers would have to balance the total federal budget every year, including capital investments.  They couldn’t borrow money to finance infrastructure improvements or other investments that would boost future economic growth.  And if the federal government ran a surplus one year, it couldn’t use any of that surplus the next year to help balance the budget.
  • From the economy’s perspective, the fact that states have to balance their budgets even in recessions makes it even more important not to require the federal government to do the same. States’ balanced budget requirements force them to cut spending and/or raise taxes at the worst possible time:  when the economy is weak and needs more public and private spending, not less.  These measures help keep state budgets in balance, but they can also make downturns longer and deeper — and the current downturn is no exception.The federal government plays a more positive role in a downturn precisely because it doesn’t have to balance its budget.  Federal revenues weaken during a downturn and spending on unemployment insurance and other social programs increases, causing deficits to expand; these “automatic stabilizers” offset part of the decline in spending, cushioning the impact of the downturn.  Also, federal policymakers can enact stimulus measures to help shore up demand during a downturn, as Congress did in the 2009 Recovery Act.

    A balanced budget requirement would cripple the automatic stabilizers and make meaningful stimulus measures impossible by forcing federal policymakers to cut spending and/or raise taxes when the economy has weakened, just as state policymakers already must do.  That would set off a vicious spiral of bad economic and fiscal policy: a weak economy would lead to higher deficits, which would force more spending cuts or tax increases, which would weaken the economy further.  As Congressional Budget Office head Douglas Elmendorf warned Congress, a balanced budget amendment “risks making the economy less stable, risks exacerbating the swings in business cycles.”

For some of the other reasons why a balanced budget amendment is a bad idea, see our recent report.

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Nicholas Johnson

Johnson serves as Vice President for State Fiscal Policy. You can follow him on twitter @NickCBPP.

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2 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. 1

    Well those two issues are just the tip of the iceberg.

    The states get money from the federal government, but the federal government doesn’t get money from any higher entity. States can make pleases to the federal government or senators can get earmarks or make requests for emergency help, etc. to shore up budget, the federal government has no larger entity to turn to.

    The states have nothing to do with monetary policy. The national debt is a component of monetary policy. A balanced budget amendment would tie the hands of the Federal Reserve making it impossible to set monetary policy.

    The states don’t finance war, the federal government does. I’m no advocate of war and want military spending cuts, but it would be beyond foolish to create a situation where war COULDN’T even be financed at all. If this existed in the 1940s we’d all be speaking German by now… or Russian…

    It’s just totally stupid and not even worth consideration really…

    Do we need to practice reasoned constraint, yes we do, and we need to get our budgets under control right now… largely through raising taxes. The same folks calling for BBA now said nothing when Reagan, Bush I and Bush II ran up the debt, and they were the main ones to do it, WITH Republican congresses in some cases!

    Give me a break…

  2. JP Nicolais #

    All of the endless debate avoids the major question of what role we as a country can agree the government should play. Until legislators can reach an agreement on this complex set of issues, talks of spending cuts, revenue increases, balanced budgets etc. are fruitless. I’m not at all confident that such an agreement is possible for a country of our size. This situation means that we will lurch from crisis to crisis and have a nation that has no leaders but only a group of partisans battling for their causes, interests etc.

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