Balanced Budget Amendment the answer? Boozman says yes, Pryor no, Part 35 (Input from Dan Mitchell of the Cato Institute Part 7)

Classic Ron Paul: “We have not seen any sincere effort to cut any spending”

4/24/1997, C-SPAN

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Steve Brawner in his article “Safer roads and balanced budgets,” Arkansas News Bureau, April 13, 2011, noted:

The disagreement is over the solutions — on what spending to cut; what taxes to raise (basically none ever, according to Boozman); whether or not to enact a balanced budget amendment (Boozman says yes; Pryor no); and on what policies would promote the kind of economic growth that would make this a little easier.

Dan Mitchell wrote a great article called “Why a Tax Limitation/Balanced Budget Amendment is Needed to Control Spending,” Cato Institute, Feb 19, 1997. I will be posted portions of that article the next few days. Here is the seventh portion:

Are Deficits and Debt Inherently Bad?

Contrary to rhetoric, borrowing is not evil. There have been times in which government borrowing has been in the national interest. Winning World War II, for instance, probably would have been impossible if the government had not been able to tap private credit markets. Similarly, the limited extent to which President Ronald Reagan’s restoration of the U.S. military added to the national debt was a small price to pay for the collapse of communism.

There are analogies from the private sector as well. Almost all households and businesses go into debt at some point. Consumers borrow to buy cars, families borrow to build homes and send their children to college, and businesses borrow to expand productive capacity. There is nothing wrong, either morally or financially, with these decisions.

Although deficits and debt are not necessarily bad, politicians certainly have abused the privilege. Like profligate consumers who use credit cards to live beyond their means, many politicians see government borrowing as a way to increase federal spending for programs that are not in the nation’s best interests. The difference between the irresponsible consumer and the irresponsible politician is that bad behavior on the part of the consumer leads to a bad credit rating and a sharply reduced ability to borrow money. Politicians escape a similar fate because they can pass the costs of a bill on to the next generation. By requiring a supermajority vote to issue new debt, however, the balanced budget amendment will impose a similar restriction on such fiscally reckless politicians.

Do Deficits Really Stimulate the Economy?

Opponents of a balanced budget requirement, particularly those in the Clinton Administration, argue that deficit spending is a useful tool to jump-start a sluggish economy. By limiting deficits, Treasury Secretary Robert Rubin and others claim, the balanced budget amendment somehow will make economic downturns more likely. This argument is based on the economic theory known as Keynesianism. According to this theory, which first influenced policymakers in the 1930s and remained popular into the 1970s, politicians can stimulate economic growth by borrowing money and increasing government spending.9 Critics from the beginning noted that this theory did not make sense, but politicians liked Keynesian economics because it gave them a quasi-respectable rationale for increased spending.

Ultimately, reality proved to be the undoing of Keynesian economic theory. The economic stagnation of the 1970s showed that deficit spending — especially when combined with rising taxes and inflation — was not a recipe for growth. Moreover, the success of President Reagan’s supply-side tax cuts further undermined the case for Keynesian policies by showing that improved incentives were the key to growth. Nonetheless, there are some who still cling to Keynesian theory.

Despite the accumulated evidence, both from the United States and from around the world, the Administration may believe that deficit spending truly is good for the economy. Even though all versions of the balanced budget amendment contain provisions that allow for supermajority approval of deficits and debt, the White House has launched an extensive lobbying campaign against the amendment.

ENDNOTE

Keynesian theory also favors using monetary policy to fine-tune the economy; but just as the Keynesian view on deficits has fallen into disfavor, so has this notion of manipulating monetary policy.

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