Sunday Sermon: What Good Are Balanced Budgets?

Joe Weisenthal asks the question (boldface mine):

What good are balanced budgets? That’s a question that doesn’t get asked enough. People of various political ideologies often accept as a fact that, ceteris paribus, a balanced budget is better than a budget in deficit. But why? Very rarely do people actually show the math and explain what the real-world benefit of this is… the last time the U.S. ran a budget surplus was in the late 1990s. That was swiftly followed by a stock market crash, a recession, a housing bubble, and then the mother of all financial crises in 2008. So when you look at that surplus, you have to wonder: What tangible, standard-of-life improvement did it confer on the American people? Because real world benefits are what economics is all about. If you can’t point to any, or even theorize what they might be, then saying something is “good” is meaningless rhetoric. Now of course for a household, you probably want to run a surplus, so that in the bad times, you can spend your savings and smooth out your consumption. But of course, persistent government deficits haven’t been an impediment to either more spending or tax cuts from the U.S. government, so that doesn’t seem to apply. So seriously–and this is not trolling or a provocation–what is it about balanced budgets that people think materially benefits the welfare of the nation?

Answer: there is none. Deficit spending and reduction are tools, nothing more, for controlling inflation and for allocating resources (through spending and taxation).

And that last sentence terrifies many conservatives and neo-liberals. Like conservatives who are agnostic, but believe it’s important that the hoi polloi believe in God (otherwise they/we would run riot), the story of deficit spending has political uses (“We can’t afford to do X”), even if it is utterly unfounded in reality.

This entry was posted in Economics. Bookmark the permalink.

4 Responses to Sunday Sermon: What Good Are Balanced Budgets?

  1. A. U. Contraire says:

    The devil is in the details concerning the Federal Debt and the balanced budget. About 6% of the budget is interest on the debt, which is, for instance, 3x what the Federal Government spends on science, energy, and the environment. Clearly a point can be reached where deficit spending becomes a major problem that has dire consequences. See Greece. Saying deficit spending or surpluses are good or bad is akin to calling any tool good or bad. It depends on how they are used.

    The economy is complicated. Running surpluses for a couple of years was hardly the sole cause of the tech bubble or housing bubble. I don’t know what the cause-and effect mechanism would be. Lower interest rates? We don’t want cheap money because investors will do something stupid? That’s not a convincing argument against a surplus. How ’bout have cheap money and have investors create jobs or fund scientific breakthroughs. That’s more a case for smarter regulation.

    On the other hand, forcing a balanced budget on a yearly basis is an inane idea. When the economy is good and taxes are rushing in, Congress will look to spend the largesse, which could easily feed into bubbles as the economy is overheating. Likewise, as revenues are crashing during recessions, Congress will have to cut government spending to achieve a balanced budget, which will deepen the recession. Artificially forcing a balanced budget on a set schedule can be positive feedback into the economy, which any control engineer will tell you is a recipe for disaster.

    Ideally the budget will be balanced, or nearly balanced, over a business cycle. When the economy is overheating, the Federal Government saves money with a surplus, which takes money out of the economy and helps keep peaks from turning into crashes. Those savings are then spent during bad times through deficit spending to shorten recessions and reduce the depth of the valleys. That’s negative feedback into the economy, which is good control practice. The savings from surplus years prevent interest on the debt from eating through the budget when deficit spending is warranted. If the debt is already too large, the government is constrained when it needs to gush money, as after the financial crisis. Not that the stimulus couldn’t have been larger and broader the last go around.

    However, Congress probably can’t be trusted to exercise rational spending methods. That’s why automatic stabilizers like unemployment insurance are good programs, moral hazard notwithstanding. They naturally require spending during recessions, and the spicket is cutoff when times are good.

    • albanaeon says:

      Funny. You ran right into Mike’s point here in that you didn’t mention WHY a balanced budget is good, even over a business cycles. Besides pablum hogwash that the government, as an issuer of currency, can “save” money for “bad times.”

      • A. U. Contraire says:

        No, you just missed the point. It’s good for stabilizing the economy in booms because it is counter-cyclical to the business cycle. Running deficits during recessions is good for the same reason. It’s provides negative feedback, a basic engineering principle in control theory.

        I’m not militant about the deficit at all. I’m not concerned about low levels of debt. However, I don’t think hardly any mainstream economist argues that debt is irrelevant at any level. You want some cushion when a major crisis hits. Likewise, not having to spend 6% of the budget on interest would be a good thing.

  2. Jane Hay says:

    One of the major conservative memes is “family budgets = govt. budgets, and you balance your family budget, don’t you??” They use this constantly in ads, speeches, etc. No one seems to point out that most family budgets aren’t REALLY “balanced”, are they? You have a mortgage payment, car payment, etc. etc. If the entities holding this debt were to demand repayment tomorrow, you would be bankrupt…. but you’re not, are you? You are employed (revenue coming in), and you make payments (expenditures and interest), and BECAUSE of your indebtedness, the economy as a whole benefits. As long as it is kept under control, it is an economic plus, NOT a problem …but no one ever calls the cons out on it …

Comments are closed.