Why A Permanent Balanced Budget Is Policy Nonsense

Simple.

A balanced-budget, instead of being countercyclical (spending is increased in a recession to expand the economy), is pro-cyclical (spending is cut in a recession and increased in a growing economy).  Countercyclical policies counters inflation, unemployment and slow growth, while pro-cyclical makes deflation and inflation worse, increases unemployment in a recession, reduces growth in a recession and pushes growth when it is not needed.

A balanced budget amendment takes economic policy out of the hands of government—not a good result by making business cycles worse.  Policies become exactly backward to what they should be.  Nevertheless, you can reduce government debt through spending and revenue changes, but not just spending without gutting publically-favored social safety net programs.

About Stephen McGaughey
Economist and international consultant in economic development programs

2 Responses to Why A Permanent Balanced Budget Is Policy Nonsense

  1. solutions777 says:

    History has shown that government economic policy does little to help the economy. This is because the government is run by politicians. Politicians do not understand economics. If their economic advisors do, then the politicians are not listening to them. There is also the issue of the public wanting only the good while being unwilling to accept the bad. This creates a knee-jerk reaction. The economy like everything else does not always run smoothly. The public needs to learn the lesson; you cannot always get what you want.

  2. SMcG says:

    The “wrong” economic policies hurt the economy, not “any” economic policy. Actually, there is plenty of evidence that policy can be well run. Examples included things like unemployment compensation that help people in a recession. Under a balanced budget, social safety net programs like this would have to be restricted, thus restricting demand and national income. A bad outcome. It seems to be the current politicians on the right that don’t understand economics.

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