Nobody From Nowhere (@i8dc)

Occasional Common Sense

Krugman, Deficit Growth’s Sources, and the Balanced Budget Amendment

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Krugman explains the sources of the growth in the deficit from 19.6% of GDP in FY 2007 to 23.8% in FY 2010.  Short answer: falling GDP (1.2%), Medicaid and unemployment (2.0%), and stimulus (1.0% and falling fast).  More than 3/4 of the increase in spending has been automatic responses to a flagging economy.

But what would have happened under a balanced budget amendment (BBA)?

Most formulations of a BBA base the limit on any year’s spending on projections of that year’s revenues.  When the FY 2009 budget was decided, revenue was expected to be much higher than it ended up being.  What would have happened when it became apparent that revenues were coming in some 20% lighter than projected?  Would spending have been suddenly reduced by 20% (or more)?  One thing’s certain – 2009’s deep recession would not have been met with a $150 billion increase in Medicaid and unemployment benefits.  And those block grants to the states, that helped keep teachers and public safety workers employed?  Wouldn’t have been possible.  We would have seen more unemployment, and those affected would have been devastated.

And then it would have gotten much worse.

Between the 2009 and 2010 budgets, projected revenue for the next fiscal year dropped by close to 20%.  The $419 actual billion drop in revenue for 2009 (which would have been worse if not for deficit spending) was expected to be followed by an increase of $60 billion. The BBA-required spending limit for 2010 would have been an enormous cut. Assuming all Social Security and Medicare revenues would go to funding those programs, the one-year hit on all other federal government spending would have been 29%, or 3% of GDP.  Rather than the modest gains we saw in 2010, the recession would have been extended for at least another year.  

The basic problem with a balanced budget amendment is that it precludes the federal government from doing exactly what it should do during recessions: step in and provide support.  Automatic stabilizers such as unemployment benefits and Medicaid cost more when more people need them, which happens not coincidentally when tax revenues decline.  A balanced budget amendment would hinder if not eliminate this fundamental function of government — to help those who are temporarily unable to help themselves.

And the positive feedback loop of reduced government spending on top of reduced private economic activity would make recessions both deeper and longer.

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Written by David Clayton

July 29, 2011 at 11:56 pm

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