Friday, December 16, 2011

The Economic Consequences of a Balanced Budget Amendment

Many I've talked to who support a Balanced Budget Amendment agree that there will be economic consequences, but view them and necessary pain.  Much like chemotherapy.  So, as your oncologist, let me explain what I have been able to find out about a BBA.  Balancing the budget within the next two years is likely impossible in this economy.  Here is why.


Many employed persons today are employed by the Federal Government either indirectly or directly.  Indirect government employees are contractors or those whose paychecks are not signed by Uncle Sam, but signed by the paymaster of a private company, like Northrup Grumman, but the money they make still comes from tax dollars.


An economist at the Macroeconomic Advisers Group, based in Clayton, Missouri estimates that the Balanced Budget Amendment would, cause "the economy would shrink by 12 percent, and unemployment would jump to 16 percent from the current 9 percent.  The dire consequences wouldn't stop there. As people lost their jobs, they'd pay less in taxes, so Congress would have to make more spending cuts. We'd be in a downward spiral of suffering" (Nicklaus, 2011).


I must emphasize that when the government taxes and spends, there is no benefit to the economy.  The only way that the government stimulates the economy is by borrowing and spending.  The 16% is the total effect that current borrowing activities have on the economy.


The question should be asked, why do we need a balanced budget amendment?  This blogger's opinion is that our elected leaders, from President Obama to Congressman Chaffetz do not have the courage to propose the needed spending cuts.  You can publicly assail government spending all you want, but when it comes time to actually ax a program, it does not happen.  Not one member of Congress has the courage to make the tough choices.  Not Hatch, nor Matheson, nor Bishop, nor Chaffetz not even the Tea Party Senator, Mike Lee.


It is argued that most people do not live off of a balanced budget every year.  If you have borrowed money for a car, a house or school, this year then you do not have a balanced budget and are spending more money than you take in.  I know people who have not borrowed for a car or for school, but I know of almost no one who can pay cash for a house.  That is what a balanced budget means.  You borrow money for nothing, ever.  Not even for your home.


You might say at this point, "Ben, you have just contradicted yourself, shouldn't government spending remain at the same level during this recession?"  I will respond by saying that there are ways to cut the federal budget even today, but no one in congress has the courage to do this.  Here are some ideas.


1.  A freeze in pay increases for all civilian federal government employees GS-5 and higher and for all military officers above the rank of O-2.  This should be easy to sell.  If your civilian counterparts are not getting raises, then neither should you.


2. A whistle-blowers award and protection for anyone who reports fraud, waste and abuse in the government.  Much of our taxpayer money is wasted.  We should reward those who help us stop it.  I have no problem in rewarding with thousands someone who saves us millions.


3. And end to all double and triple dipping in government pensions.  One pension should be enough for everyone.  This will take a ton of courage to stop double dipping and a ton of courage to justify it's continuation.


4. A ban on all congressional earmarks.  Let's stop sneaking spending.


5. A requirement that anyone requesting a government grant prove that they have exhausted all private funding options first.  Government grants should be last resort grants instead of first resort grants.


6. A bonus to government contractors who hire people unemployed for new government contracts first before they hire internally or hire someone from another firm.  This will take people off of unemployment and welfare rolls and will save the government money.


There are many ideas out there of how the government can spend less money and not have a negative effect on the economy.  Not all dollars that the government spends are multiplied equally.  Perhaps my readers can think of other ways the government can save money in this economy.  If your suggestion is good, I will post it.  Please no comments like, "just kill the department of education" or "let's legalize marijuana."  I will address options like that in later blogs.


It is very easy to say, "Hey, we need a balanced budget."  But taking a scalpel to the Federal Budget is another reality altogether.  Before the surgeon has scrubbed, there will be a flood of lobbyist in Congress hoping to cancel what has been done.  There is even a cow flatulent lobbyist stating that studies on bovine methane should be kept and promising gifts and dinners to keep them.  For every dollar spent in Washington, someone has lobbied for it.  For every dollar cut from the budget, someone will lobby to keep it.


Most Republicans are in one of two camps.  One camp is that balancing the budget now is the best way to help the economy.  It has been done at the state level in many states.  But most of this happened in better economic times.  The other camp realizes that there will be some economic pain, but the economic pain we experience because of a balanced budget will be better than the economic pain we would experience because of a balanced budget.


The people who are in the second camp are closer to the truth.  But the people in the first camp could be right if the budget is balanced in a growing economy.  In a growing economy, displaced government workers should quickly find new work.  When the economy is growing, less government debt would be welcome.  Investors who were vested in government bonds can move their investments to private companies.  The stock market will grow and companies looking for experienced people will hire government workers.

But understand that there is a reason why financial advisers help people focus on credit ratings.  The ability to borrow money is something that all businesses and families need.  That does not mean that you have to borrow, but it is nice to know that you can if you have to.  A business that does not have the ability to borrow money may resort to passing on expenses to consumers when times get bad.  

Imagine what could happen if the BBA is passed.  The next time there is a minor economic crisis, Congress could resort to raising taxes.  They may justify by telling people that the increases are necessary to cover unemployment claims or increased welfare needs.  They may tell people that if companies would only hold on the laid off workers, the tax increases would not be needed.  They may tell people that the tax increases are temporary.  But how many tax increases are temporary?

If the BBA passes, increased taxes will be the only tool the government has to deal with unexpected decreases in revenue, like a new recession is to raise taxes.  If the BBA passes, the only tool that Congress has to deal with an unexpected expense, like a new war or a major natural disaster is increased taxes.

This blog is in favor of a balanced budget in a reasonable time frame.  In this country, we do not tax wealth, we tax economic activities.  It will be easier to balance the budget in an improved economy.  That should be the top priority of Congress.  With a growing economy, resources can be transferred from the public sector to the private sector and the debt can be paid down.  If this happens, the burden of interest payments can be reduced and momentum in paying down the national debt can be gained.

Congress needs to have the courage to balance the budget and get rid of wasteful spending.  They do not need to hide behind prohibitive constitutional amendment to do so.


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