Marco Rubio, Republican candidate for Florida's Senate seat addressed Freedom Works Friday night about his proposals for bringing America back to its roots. A key component of his proposal is that he will fight for a balanced budget amendment. In my previous post, I spoke about fiscal responsibility and lowering the national deficit. This would lead you to believe I would jump all over this idea as a novice idea to restoring America's economy. Balanced budgets are a terrific idea, and should be what we strive for every time a budget is submitted. However, if balanced budgets are mandated by law, it would dangerously affect America. The reason for this is that the government can take actions to lessen the effects of a downturn in the economy. Remember, one of the first principles of economics is the government can (in some cases) improve market conditions.
The best example to show this argument is the current economic situation we are facing. At the national level, two actions were taken by Congress to slow down the recession. Congress cut taxes and increased government spending. Each action taken by Congress adds to the current deficit because the tax breaks decrease government revenue and the increased spending from the government is on borrowed money or the selling of bonds through the FOMC. This form of deficit spending is necessary when facing tremendous downturns in the economy like America did. If gauged right, Congress or the Fed can take action to undercut the most severe parts of the recession. However, with a balanced budget amendment, the only option Congress can do is cut taxes and cut spending. You may think that this is a great idea, lowering taxes via spending cuts, but you must look deeper into it. There are automatic stabilizers built into America's economic policy that are there to help the economy during down times. For example, unemployment pay. When the government goes south, more people lose their job. This means that the number of people receiving unemployment benefits increase, which is good. The reason for its necessity is because it prevents people from reaching unrecoverable poverty, but also gives money directly to people so they can spend it. If there was no unemployment benefits, the two or three extra percent of the population that became unemployed would stop spending money because they have no money to spend. The direct aid to the people helps maintain some level of consumer spending. Under a balanced budget, the government would have to cut and cut and continue to cut spending to a point where it would not be able to prop up any program to keep the economy from falling into a further downturn.
Looking at states with balanced budget amendments, it seems from the data provided by the Bureau of Labor and Statistics are hit harder than states without the amendment. Looking at California, Rhode Island, South and North Carolina, compared to Montana, Pennsylvania and Texas, this shows to be true. CA, RI, SC and NC all have unemployment over 10%, with the highest California at 12.3%. The states without the balanced budget amendments had significantly lower unemployment rates. This does not hold true with Nevada and Michigan for obvious reasons. Nevada was destroyed by the housing bubble and the downturn of the automobile industry in Michigan (which was a major employer) added to tremendous levels of unemployment unlike in any other state.
Let’s look at California. It has an amendment to balance its budget every year. However, when the recession hit, many people lost their jobs and became dependent on temporary unemployment benefits. More money had to be sent to aiding the programs to help its people, the only problem was the money had to come from somewhere. Unfortunately for California, they had no options but to cut a tremendous amount of its economy just to pass a budget. This mandated austerity proved to greatly hurt its economy. With a national balanced budget amendment, California can easily become the American economy. The government has to have the power to deficit spend in desperate times.
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