One thing is certain about the deal reached this week to raise the debt limit: Deficits arent 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 wont 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, its clear that taxes fall during a recession and spending needs rise, as more people need unemployment insurance and Medicaid. Whats 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. Swedens 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 doesnt 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.