Thursday, July 28, 2011

Another dumb Republican idea—Balanced Budget Amendment

Republicans constantly come up with dumb ideas for legislation that sound good to some people but would cause enormous harm if enacted.  The latest in a long line is the proposal for a Balanced Budget Amendment contained in the Boehner debt ceiling/deficit reduction plan.

If the Republicans succeed in passing a Balanced Budget Amendment, pray we never again experience a recession.  Why?  As the Center for Budget and Policy Priorities points out, a Balanced Budget Amendment would cause serious damage during an economic downturn.

When the economy weakens, revenue growth drops and revenues may even contract.  And as unemployment rises, expenditures for programs like unemployment insurance (UI) — and to a lesser but significant degree, food stamps and Medicaid — increase.  These revenue declines and expenditure increases are temporary; they largely or entirely disappear as the economy recovers.  But they are critical for helping struggling economies avoid falling into recessions and for moderating the depth and length of recessions that do occur. 

During economic downturns, consumers and businesses spend less, which in turn causes further job loss.  The drop in tax collections and increases in UI and other benefits that occur automatically cushion the blow, by keeping purchases of goods and services from falling more.  That is why economists use the term “automatic stabilizers” to describe the automatic declines in revenues and automatic increases in UI and other benefits that help to stabilize the economy when it turns down.

A constitutional balanced budget amendment, however, effectively suspends the automatic stabilizers.  It requires that federal spending be cut or taxes increased to offset the automatic stabilizers and prevent a deficit from occurring — the opposite course from sound economic policy.

Over the years, leading economists have warned of the adverse effects of a constitutional balanced budget amendment.  For example, in congressional testimony in 1992, Robert Reischauer — then director of the Congressional Budget Office and one of the nation’s most respected experts on fiscal policy — explained:  “[I]f it worked [a constitutional balanced budget amendment] would undermine the stabilizing role of the federal government.”  Reischauer noted that the automatic stabilizing that occurs when the economy is weak “temporarily lowers revenues and increases spending on unemployment insurance and welfare programs.  This automatic stabilizing occurs quickly and is self-limiting — it goes away as the economy revives — but it temporarily increases the deficit.  It is an important factor that dampens the amplitude of our economic cycles.”  Under the constitutional amendment, he explained, these stabilizers would no longer operate automatically.

In short, if the Republicans get a Balanced Budget Amendment adopted, don’t expect any help from the government if you get laid off during a recession--go broke, go hungry, get sick, die—just don’t expect any help.  How about that for a great idea.

No comments: