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Tuesday, May 18, 2010

Balanced Budget Amendment

Today is Primary Election Day in Arkansas, Pennsylvania and Kentucky.

In the Kentucky Republican Senate Primary, Rand Paul is the favored candidate of the Tea Party movement. Part of his campaign speech includes a commitment to fight for a Balanced Budget Amendment to the United States Constitution.

The idea of a Balanced Budget Amendment is nonsense and Dr. Paul should know better than to be promoting it. If he does not, then he lacks sufficient knowledge of economics (and of the United States Constitution) to serve effectively in the United States Senate. The world, then, would be a better place were he to return to the practice of ophthalmology.

A modest deficit - in the range of two percent of the Gross Domestic Product over the economic cycle - is entirely supportable provided that the money is spent on real investment such as infrastructure (roads, bridges, ports, air traffic control systems etc) that will provide significant returns over many years. Basic research, where the value of any given project is unpredictable and therefore will not be performed by corporations, is also worthy of funding with debt. Deficits also allow for some automatic stimulus - the deficit grows a bit - in recessionary times and some automatic fiscal restraint - the deficit shrinks or even becomes a modest surplus - in boom times.

Another use of government debt is to provide a benchmark interest rate for debt that is free of credit risk. In addition, there is a desire, on the part of retirees, pension funds, banks and other financial institutions, for highly liquid investments that carry zero credit risk.

Even if there was no good economic rationale for government debt, the likelihood of a Balanced Budget Amendment ever being adopted is close to zero. The Constitution is extremely hard to amend (see Article 5 http://www.usconstitution.net/xconst_A5.html) because it requires a two thirds vote in each of the Senate and House followed by ratification by three quarters of the States. The only Amendments that have survived this process are those that command overwhelming support.

Even were a Balanced Budget Amendment to be adopted, there still remains the hard labor of deciding what expenditures to cut and, if that is not sufficient, what taxes to increase. To do that work does not require that the constitution be amended.

Since the proposed 2011 budget shows that the Federal Government plans to borrow more than thirty cents of every dollar it spends, abolishing foreign aid and other trivialities like the Departments of Energy and Education, will hardly make a difference.

Rather than engaging in Orwellian doublespeak, perhaps Dr. Paul would like to tell us what cuts he proposes and whether they will be sufficient to achieve a balanced budget. If his proposed cuts are insufficient, then he should tell the voters whether he will abandon the effort or whether he will propose increased or new taxes.

There is an old adage that a nation gets the government that it deserves. If we fall for lies and misinformation, dressed up as easy solutions, then we will indeed deserve what we get.

1 comment:

Clark Chapin said...

A cynic might think that Dr. Paul doesn't need to be serious about actually proposing this amendment, the idea just needs to be popular enough to get him elected. After that (sadly) he has six years for the voting populace to forget. Alternately, he can construct some sort of flimsy excuse or introduce the amendment but let the legislation die a natural death.