Balanced Budget Amendment Would Cripple U.S. in a Recession

About Steve Wamhoff:

Steve Wamhoff splits his time as a Policy Analyst for ITEP and the Legislative Director of Citizens for Tax Justice. He has written reports analyzing proposals to cut or raise taxes for investors, alter the estate tax, close corporate tax loopholes, prevent offshore profit-shifting, and pay for healthcare reform and other initiatives. He has also written several reports analyzing the tax cuts already enacted under President George W. Bush and President Obama.

You're not going to believe this, but one of the most popular proposals in Washington would destroy millions of jobs during recessions. It would cause Congress to scale back efforts to boost the economy exactly when those efforts are most needed.

This proposal is the balanced budget amendment to the U.S. Constitution. Even though a majority of members of the House of Representatives voted for it recently, it's not going anywhere right now because two thirds of each chamber must approve a constitutional amendment before it can be sent to the states for ratification.

And it's a good thing it's not going anywhere. A report from Macroeconomic Advisers, one of the most respected economic forecasting firms, concluded that unemployment would double in 2012 if a balanced budget amendment were in effect.

[See a collection of political cartoons on the budget and deficit.]

Most economists agree that the federal government needs to spend more during economic downturns, even if this requires deficit spending in the short-term, to help offset all the layoffs and cutbacks by the private sector.

This federal spending happens automatically during recessions because more people collect benefits like unemployment insurance and Medicaid, even as revenue drops because there are fewer incomes and profits to tax. Congress can also respond by providing additional benefits to struggling families, who are likely to immediately spend any additional money they receive on necessities, which boosts demand for products and creates jobs.

But if Congress must balance the federal budget each year, lawmakers would have to slash public services like Medicaid and unemployment insurance to prevent deficits during recessions. Of course, Congress could always balance the budget by raising taxes on the rich, which seems to have little if any impact on the economy, but the recent gridlock in the Capitol has demonstrated that too many politicians have ideological aversions to raising taxes even on those who can easily afford to pay them.

[Read: GOP Frosh Slam "Hypocrisy" from Democrats on Balanced Budget Bill.]

We all agree that Congress should get the long-term budget deficit under control. It's one thing to run deficits during recessions, but failing to collect enough revenue during boom times is a problem. (And the tax cuts first enacted by the previous administration are a big part of that problem.) But a constitutional requirement for Congress to balance its budget, while seemingly simple and logical in the abstract, is not the solution.

• Read about how the super committee failure will affect you.
• See a collection of political cartoons on the economy.
• Read Robert Schlesinger on the upside down 2012 politics of the economy and the deficit.

Tags:

debt,

deficit and national debt,

federal budget