Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, January 29, 1995 TAG: 9502010015
SECTION: EDITORIAL PAGE: B3 EDITION: METRO
SOURCE: KURT STEPHENSON
DATELINE: LENGTH: Long
Bluntly stated, a balanced-budget amendment is bad economics.
Requiring the federal government to balance the budget every year would have a tremendously destabilizing impact on the overall economy.
During recessions, the federal government can stimulate the economy either by increasing spending or cutting taxes. Either strategy injects needed money and spending into the economy. It also increases government deficits. Such a spending pattern in a recession provides a stabilizing influence on prices and employment.
Yet, a balanced-budget amendment would work in exactly the opposite fashion.
Suppose the balanced-budget amendment is passed. Later, the country enters a recession. As people's incomes fall, so do federal tax collections. The federal budget slips into the red.
By law, the federal government will be required to either increase revenue or decrease spending, or both, in order to balance the books.
How could the federal budget be put back into the black? Taxes could be raised. If raising taxes is considered political suicide during a recession, then federal spending could be cut. Spending on military facilities, personnel, and production could be reduced. Benefits to the elderly, sick and unemployed could be slashed. Yet, all these efforts will take money out of people's pockets and out of the economy, thus worsening the recession.
Is there any historical evidence that such perverse economic results could come from something as wholesome as balancing the federal budget? Plenty.
The worst economic event in our country's history was the Great Depression. During the first years of the Depression, President Herbert Hoover and Congress consistently tried to balance the budget, and even raised taxes at a time when 15 percent of the labor force was unemployed. Most economists agree that the balanced-budget principle contributed to a worsening of the Depression.
Franklin D. Roosevelt, Hoover's successor, committed the same blunder. After incurring budget deficits his first four years in office, FDR attempted to balance the books in 1937. The combination of tax increases and spending cuts, however, helped create a recession within a depression. After five years of modest improvement in the economy, unemployment rose again in 1938.
It was the massive injection of federal spending from World War II (not the war itself) and massive federal deficits that pulled the country out of the Depression.
Although a deficit increase could have a stabilizing influence on the economy, critics may howl that we have done so only at the expense of future generations burdened with the mounting debts.
The popular metaphor is then brought up that says government should be required to balance the budget just like average citizens should balance their check books. The metaphor is grossly misleading.
Suppose you have a job that pays $15,000 a year. You have no assets but you are debt-free. Now you land a job that pays $50,000 a year. You promptly go out and buy a house for $75,000. You are now in debt, but are you worse off?
Others say government should be run more like a business. Imagine a headline in ``Fortune'' that reads "IBM debt up 2,000 percent since 1950." Would IBM executives and stockholders be alarmed by this headline? Of course not. In the long term, IBM's total debt is growing, but IBM's assets and profits have been growing at a much faster pace.
The historical record of the federal government deficit reflects just such a pattern.
In almost every year since World War II, the federal government has incurred a budget deficit. Add the yearly deficits - and the occasional surplus - and you get the federal debt. So, the federal debt has also increased almost every year.
In 1950, the federal debt totaled roughly $260 billion. Today, it is over $4 trillion, an increase of about 1,400 percent.
While the federal debt increased, the value of all goods and services produced in the economy annually increased at a faster rate. In 1950, the gross domestic product was $266 billion. This year, the economy will produce over $6 trillion worth of goods and services, an increase of more than 2,100 percent from 1950.
Thus, our ability to pay for the federal debt has clearly outpaced the debt's growth. Relative to the size of the economy, the federal debt was actually smaller in 1994 than it was in 1950.
Government can't simply run up deficits of any magnitude. Any unnecessary spending is wasteful. When federal debt consistently grows faster than the national economy, a warning flag should go up. Efforts to correct this problem should focus on responsible spending that promotes economic growth.
But a balanced-budget amendment is not the right solution. In the shortsighted and politically expedient effort to pass a balanced-budget amendment, the federal government could end up crippling the economy of the next century. If the amendment passes, the irony will be that it was a balanced budget which impoverished future generations.
Kurt Stephenson is an economist and postdoctoral research fellow at Virginia Tech.
by CNB