Balanced-budget amendments are getting a lot of play these days on both sides of the Atlantic. Most economists oppose them vociferously as they lead to pro-cyclical economic policies, dramatically exacerbating economic downturns. They are a return to Herbert Hoover economics. A real world example is the nearly unanimous adoption of these amendments by state governments in the U.S., which has required them to slash jobs, raise taxes and cut government spending during the worst recession in the postwar period. State legislatures are now busily removing these amendments, but they at least were able to fall back on transfers from the U.S. federal government. No such fallback mechanism would be available in the Eurozone. Imagine if the U.S. had a balanced budget law in 2008/09 and was forced to immediately layoff public sector workers, raise taxes and cut spending in the face of the crisis-induced plunge in tax revenues, not to mention the implications for defence spending during war or government spending to combat terrorism. Some have suggested that these balanced-budget amendments could contain language to cover these exceptions; there is no way to cover all possible future outcomes, which begs the question of why bother to have them in the first place.The above is "common sense" and Economics 101, but with the radical right in the US, there is no common sense and no real understanding of economics. They are ideologues blindly destroying their own country. Amazing.
Are we really ready to obliterate counter-cyclical fiscal policy? Do we really believe that fiscal tightening during a period of economic weakness reduces deficits? This is not only a bad idea, it is self defeating. Cutting government spending or raising taxes weakens economic activity and thereby reduces tax revenues, which only increased budget deficits.
Saturday, August 20, 2011
A Canadian Perspective on "Balanced Budget Amendments"
Here is a bit from Sherry Cooper, VP & Chief Economist of the Bank of Montreal Financial Group, in an article in the BMO's publication Focus: