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Don’t be fooled by balanced budget amendment proposals

Last Thursday, Congress voted on a balanced budget amendment. This sham legislation is a phony attempt by members of the House to show they are fiscally responsible. Coming on the heels of recent budget-busting tax cuts and spending increases, the proposed balanced budget amendment could not be more hypocritical.

As our representatives fully-well know, to become law, a balanced budget amendment would have a very, very slim chance of ever garnering the required support from two-thirds of the members of both the House and the Senate and from three-quarters of U.S. states. The House vote, which was largely along party lines, was 233 for the proposed amendment and 184 against it. You can see how they voted at http://clerk.house.gov/evs/2018/roll138.xml.

At its best, the balanced budget proposal is simply grandstanding by members of Congress to deceive us into believing they are fiscally responsible. Admittedly, they can’t seem to keep their hands out of the government’s cookie jar, but it’s unlikely they would pass a law to keep that cookie jar out of their own reach.

At its worst, a balance budget amendment could have devastating consequences for the economy. There are times, such as during the Great Depression of the 1930s and the Great Recession of the late 2000s, when the government should outspend its revenues. During those times, increased government spending and tax cuts are needed to jump start the economy. As history shows, in the aftermath of the Great Depression, the economic potential of the U.S. was not fully realized until government spending for World War II provided a huge stimulus to the economy. Likewise, the Great Recession would have been much deeper and more prolonged without a significant increase in government spending to save the auto industry, the finance industry, and other sectors of the economy. In those times, government budget deficits provide sorely needed boosts to the economy.

Now is not one of those times.

Soaring deficits pose threats to economy

Also last week, the Congressional Budget Office released its budget and economic outlook for the next ten years. Not surprisingly, the government’s annual budget deficits and the national debt look worse than ever. The deficits and debt are growing faster than national income/gross domestic product. That’s bad news because it indicates our ability to repay the debt is falling. According to the CBO:

Federal debt is projected to be on a steadily rising trajectory throughout the coming decade. Debt held by the public, which has doubled in the past 10 years as a percentage of gross domestic product (GDP), approaches 100 percent of GDP by 2028 in CBO’s projections. That amount is far greater than the debt in any year since just after World War II.

The CBO also blamed recent tax cuts and spending bills for the soaring budget deficits. The CBO report says “Projected deficits over the 2018-2027 period have increased markedly since June 2017 … The increase stems primarily from tax and spending legislation enacted since then.” As shown in the chart, the budget deficit is likely to exceed $1 trillion in 2020 and $1.5 trillion in 2028.

From 2018 to 2028, interest payments will consume an ever-larger portion of the federal budget and overtake spending on all other items except Social Security and Medicare. Other nasty side effects of the soaring debt are higher interest rates, which result in reduced growth in private-sector capital investment, productivity, and wages.

The CBO report warns “such high and rising debt would have serious negative consequences for the budget and the nation,” including:

Federal spending on interest payments on that debt would increase substantially, especially because interest rates are projected to rise over the next few years.

Because federal borrowing reduces total saving in the economy over time, the nation’s capital stock would ultimately be smaller, and productivity and total wages would be lower.

Lawmakers would have less flexibility to use tax and spending policies to respond to unexpected challenges.

The likelihood of a fiscal crisis in the United States would increase. There would be a greater risk that investors would become unwilling to finance the government’s borrowing unless they were compensated with very high interest rates; if that happened, interest rates on federal debt would rise suddenly and sharply.

Squandered opportunity

The economy is now running at or near full employment, and output is at or near its full potential. Now is a time when the national debt as a percent of gross domestic product/national income should be reduced not increased. Unfortunately, Congress has squandered that opportunity.

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