NEWSROOM
Commentary Articles
In The News
News Releases
Experts



Media Inquiries

Kim Cloidt
Director of Marketing & Communications
(510) 632-1366 x116
(202) 725-7722 (cell)
Send Email

Robert Ade
Communications Manager
(510) 632-1366 x114
Send Email


Subscribe



Commentary
Facebook Facebook Facebook Facebook

Contribute
Your participation will advance liberty. Join us as an Independent Institute member.



Contact Us
The Independent Institute
100 Swan Way
Oakland, CA 94621-1428

510-632-1366 Phone
510-568-6040 Fax
Send us email


Interested in working with us?  Click here for more information.

Commentary

The Virtues of an Unbalanced Budget Amendment


     
 Print 

One thing is certain about the deal reached this week to raise the debt limit: Deficits aren’t going away. Even if the deal is fully implemented it will not bring the US budget into balance. Deficits will continue to increase as will spending. Before the deal, the Congressional Budget Office was projecting federal government spending of $46.06 trillion over the next 10 years. With the deal, spending only falls to $43.66 trillion and that is assuming that future politicians follow through on the promised cuts.

The public is tired of repeated failures to put the U.S. financial house in order. A recent CNN poll showed that nearly three out of four Americans supported a constitutional amendment to balance the budget. If the politicians won’t be virtuous then, so the thinking goes, we must substitute law for virtue. (Top 10 Government Showdowns.)

The problem is that a recession is not the best time to raise taxes or cut spending, which is what you would be required to do every time you hit an economic rough patch if we had a balanced budget amendment. Keynesian economists believe that spending during a recession can stimulate the economy. But even if one is skeptical of this argument, it's clear that taxes fall during a recession and spending needs rise, as more people need unemployment insurance and Medicaid. What’s the point of unemployment insurance if it must be cut during a recession?

So instead of a balanced budget amendment I propose a better idea might be an unbalanced budget amendment. Like now, an unbalance budget amendment (unBBA) would allow the government to run a deficit during a recession. But unlike now, the unbalanced budget amendment would require the government to run a budget surplus in good times. So although unBBA allows for deficit spending on things like unemployment and food stamps during a recession, it would have similar effects to a balanced budget amendment over time because surpluses in good times would be spent in bad times. The surpluses, however, would come when we can most afford them, during a boom and the deficits would come when we most need them, during a recession.

The idea of an unbalanced budget amendment is not new. Sweden’s government has been required since 2000 to budget for a 1% surplus over the business cycle. Since implementing their unBBA, Sweden has successfully brought their budget into balance and created a surplus.

Even more ancient sources are supportive of an unBBA. In the Bible, Joseph doesn’t advise the Pharaoh to balance the budget instead he tells the Pharaoh, save during the seven fat years so you are prepared for the seven lean. An unbalanced budget amendment reflects this simple and ancient wisdom.


Alexander Tabarrok is Senior Fellow at The Independent Institute, Assistant Editor of The Independent Review, and Associate Professor of Economics at George Mason University. He received his Ph.D. in economics from George Mason University, and he has taught at the University of Virginia and Ball State University. Dr. Tabarrok is the editor of The Independent Institute books, Entrepreneurial Economics (Oxford University Press), The Voluntary City (with David Beito and Peter Gordon, University of Michigan Press), and Changing the Guard: Private Prisons and the Control of Crime.


  New from Alexander T. Tabarrok!
JUDGE AND JURY: American Tort Law on Trial
The fear of litigation reduces innovation, drive physicians and manufacturers out of lawsuit-prone specialties, and increase manufacturing and consumer costs. In the courts, data from thousands of cases all over the country demonstrate that tort system awards are driven by political factors such as judicial elections, jury compositions, and the location of courts themselves.






Home | About Us | Blogs | Issues | Newsroom | Multimedia | Events | Publications | Centers | Students | Store | Donate

Product Catalog | RSS | Jobs | Course Adoption | Links | Privacy Policy | Site Map
Facebook Facebook Facebook Facebook
Copyright 2014 The Independent Institute