Saturday, August 06, 2011

Balanced Budget Breakdown

During the recent debt ceiling debate, which helped lead to S&P downgrading the US credit because the Republicans have publicly stated that taking the US economy hostage and threatening to blow it up to get their way is a really bad thing, one of the ideas proposed by the Republicans is a concept called the Balanced Budget Amendment.

To most people, this sounds like a reasonable thing. After all, if *I* have to balance my budget, why doesn't the government? Make it so the government can't spend more money than they take in! Pass a constitutional amendment that will make them do so!

Only the more I looked into this issue, the more I've come to decide that this is the worst idea we could possibly go with. You think the 500 point slide on August 04 was bad?

Now imagine how much worse it is under a balanced budget amendment. And it would be. Here's a few of my (admittedly inexpert) reasons.

First, the government isn't a business. And even if it is - it has to operate like one. Which means having a forced "balanced budget" is still a bad idea overall.

1. Expectations and Realizations

Every year, the US government tries to figure out how much money is going to come in, and then figure out how much money they should spend on things. This is little different than a business - they're looking at the balance sheets, and trying to look ahead for next year on how much they should spend.

But suppose that things go bad that year. Perhaps there's a bad economy so you don't bring in as much as you expected. In the real world, you look at your options - do you raise costs to meet expenses? Fire employees? Or perhaps you take out a loan knowing "OK, if I take out a loan now, continue to keep my employees and finish my upgrades, I can pay this off next year when things get good."

It's an option to go into debt. For many companies, it's a valid option to do so that when things go better, you'll be stronger than your competitors and kick their asses next economic cycle. Or you'll hold onto that one really great salesperson or manager or employee. Either way, the best option isn't to limit yourself to only two options: raise prices or cut spending. You want the third option - get a credit extension - to keep you through the bad times.

Now imagine how chaotic that would be on the United States level. Year 1 under the Balanced Budget Amendment world you have a balanced budget. Year 2 - oh, that was a great economy we have a lot of money spend more! Year 3 - whoops, revenue projects were too high cut spending or jack up taxes!

You'd have such a roller coaster effect that the "business stability" that Republicans like to blame for when businesses don't spend money because "they don't know what the government is going to do" becomes a year to year prediction as taxes and spending go up and down *every year* in order to figure out where the budget should be.

2. War and Disaster

In a real world business scenario, you make the best plans you can, then through careful risk analysis, you try to either have enough cash on hand to get you through a bad time (like, your servers crash and you need to replace them), or insurance so you can rebuild (like fire insurance).

Ultimately, though, some things you just can't plan for. And then, as a business, you have to make a decision: you either say "The losses are not worth the profits," and walk away, or decide you're going to whether through the bad time and make it through any way you can.

If you're the United States Government, though, you can't just "walk away." China finally goes crazy and invades Florida? The United States can't just say "Well, we *would* ramp up money to go pay for the war - but we're operating under a balanced budget amendment now. So I guess we have to jack up taxes. Or cut out payments to Social Security or something."

Or perhaps a hurricane that destroys a major industrial town in Texas, or a tidal wave takes out Seattle - how do you invoke the power of the US government if you're not allowed to take out a loan to cover these emergency moments of war or disaster?

Now, I know some people will be saying "John, that's an easy solution - put in the War and Disaster clause!" Yes. Because the United States isn't involved in a pair of wars now. Or can't declare a disaster at the drop of a hat. Having that clause would let it be exploited every chance that politicians could take.

3. Debt is a powerful tool for a bad economy

This gets to the heart of the matter of the philosophy behind the Balanced Budget Amendment: the Republican idea that the government is useless to the economy, and if anything, is a necessary evil so people don't get their hands on drugs or birth control.

But history has shown differently. After the crash of 1929, Herbert Hoover tried the current Tea Party based Republican thinking: that the US government debt was the problem (not, say, all of the richest 1% of the population engaging in riskier and risker financial shenanigans while the rest of the country had to borrow more and more to keep up, so when the credit bubble finally popped there was no one holding the bag). So based on Hoover's ideals, you cut government spending, balance the budget, and reduce taxes on the richest and things will get better.

As we saw, it did jack shit. It wasn't until Roosevelt was convinced that the problem wasn't cutting government spending, but increasing employment by the government spending on investments to the country (roads, schools, etc) that the economy started to turn around. The economy really got going during the biggest government spending in World War II, which employed millions of men and women all across the line.

After WWII, the country continued with some of the ideas - high taxes on the wealth (which goes with a previous discussion about why that's a good thing to prevent concentration of revenue into an extreme minority), regulation of the financial industry and methods of keeping them from growing too large (like preventing commercial banks and investment banks from mixing together, keeping banks from having too many branches per geographic area).

And one more thing - in good times, you increase taxes, increase the interest rate to encourage people to save and pay off the debt. In bad times, you drop taxes and interest rates to encourage people to borrow and spend, and increase spending in order to make up for the drop in economy. Now, if you're 1950 to nearly 1980, if you have good enough economic policies you don't have big economic disasters, like occurred with the Savings and Loans scandals of the late 80's, then the Internet Bubble of the 1990's, then the major financial collapse of 2008 which has nearly exactly the same symptoms of the 1929 Great Depression crash.

You remove the ability of the government to do those things because of the Balanced Budget Amendment - and you've just removed an entire slew of tools the government can use to help fix an ailing economy. Yes, I know - Republicans will say that there's nothing the government can do anyway except "get out of the way." And they can say that as long as they ignore the last 100 years of history, ignore how their own policies enacted since 1980 have lead to lower and lower income for the middle class, and increased recessions.

The Balanced Budget Amendment is one of those "it seems like common sense" ideas. Until you think about it. And then discover it makes no sense *at all*.

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