Balanced Budget Amendment; Would it Solve...Anything?

Next week the House of Representatives is set to vote on the so-called "Cut, Cap, and Balance" bill, aimed at achieving a viable path towards a more sustainable future. While the intentions of such a plan are indeed admirable, we learn from studying economics that intentions are meaningless; only incentives and results matter in the end. A most interesting aspect of this "Cut, Cap, and Balance" plan is the "Balance", meaning implementing a balanced budget amendment to the Constitution. A recent Sachs/Mason-Dixon poll revealed 65 percent of Americans support a balanced budget amendment. But would requiring the federal government to balance the books solve anything? And what does it mean to balance the budget?

While it sounds simple enough, there are some common misconceptions regarding both balancing a budget and how requiring the government to do so every year could affect the economy. Let us begin with what it means to "balance a budget". To have a balanced budget is to equate revenues with expenditures. In other words, you bring in as much as you put out, or spend. The literal meaning of a balanced budget is to run neither a deficit (to spend more than you bring in during a given year) nor a surplus (to bring in more than you spend). This particular definition is very narrow, implying that every cent is matched exactly a year in advance. Some would concede that running a budget surplus would not be excluded under a balanced budget amendment, however I have no reason to believe, based on my research, that this provision is included in this particular bill.

As counter intuitive as it may be, running a strict budget could actually create an environment that incentivize unnecessary spending. This can be seen in the corporate world all the time. For example, if the R&D department at a particular company ran under budget (producing a budget surplus) for a year, it is very likely that the budget for that department would be cut the next year to reflect the fact that they had been allotted "too much" the previous year. The provides incentives for every department of the company to spend every penny of the budget, whether it is needed or not. It would not be hard to imagine a branch of the government spending their way up to their limit at the end of the fiscal year in order to maintain the maximum available appropriation for the next year.

In addition, many economists prefer to have a degree of elasticity to run a surplus during the "boom times" and a deficit during the "bust times". Requiring every dollar to be accounted for would not allow the government to efficiently reap the benefits of good times or to borrow in times of great need, as we did in the wake of the 2008 recession. Most economists prefer what is referred to as a "cyclically balanced budget", which is to balance a budget not annually but per economic cycle. This, however, can only be interpreted and analyzed in retrospect, after each economic cycle is completed, and would therefore be impossible to regulate.

While a balanced budget amendment may not solve our nation's woes, it is clear to most Americans that something must be done to hold the government accountable for its spending. However, if it was possible to regulate or legislate our way to fiscal responsibility, I am sure we would have implemented it by now.