Some politicians have suggested that the United States enact a constitutional amendment requiring that the Fed

Question

Some politicians have suggested that the United States enact a constitutional amendment requiring that the Federal government balance its budget annually. Explain why such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experienced a severe recession.

Answer 1

LESS SPENDING, WAHOO!!!!!!!!!! But then the Dems would use it as an excuse to raise taxes (again). NOOOOO!!!!!!

Answer 2

Shouldn't this be under homework?

Okay, gross oversimplification: government makes $1 a year, and spends $1 a year on services. It's the ideal.

The government's incoming $1 is based on a percentage of the real income made by citizens throughout the year. So, in a boom year, the government may actually take in $1.50. Great, right?

Not so great. If you're required to balance the budget annually, you'll now have an extra $.50 to spend -- and you'll need to spend it. Balanced budget amendments are seldom considered from this perspective, because nobody cares about a balanced budget when there's a surplus.

So the government spends $1.50 when it only needed to spend $1, and some citizens say "that's nonsense, that's overspending, you should only be taking the $1 you need!" And, of course, they're right.

So the government reduces taxes, and takes in $1 the next year, and spends it. Everyone's happy, and taxes are lower.

Then, the next year, we go back to normal. The government still has $1 in necessary costs to cover, but they only take in $.75. Oops -- shouldn't have lowered those taxes so much, I guess.

So, the government essentially takes out a loan (the federal deficit is a reflection of the amount borrowed.) They borrow $.25 to make up the shortfall, and with the $.75 in taxes, they spend the $1 in necessary costs. Everyone is happy -- for now, at least.

But wait, we were talking about a balanced budget, right? Well, if the government must make a balanced budget, it can't borrow the $.25 -- it has to reduce spending by $.25 instead. So now one quarter of the necessary costs go unpaid; critical services go unfunded, and our quality of life goes down. Boo.

Now some other citizens say "Hey, that's nonsense; we should simply raise taxes back up so that necessary costs are covered." And, of course, they're right.

So the government raises taxes to collect $1 instead of $.75, and can cover the $1 in necessary costs. Everybody's happy again -- for now, at least.

So far, so good. Half the citizens might be pushing to keep taxes low, and half the citizens might be pushing to keep quality of life high -- and that's most of partisan politics in a nutshell.

Meanwhile, back to the budget: we hit a severe recession. We have $1 in necessary costs, but we only collect $.50. We can't borrow the money, because it must be a balanced budget. We can't raise taxes, either, because raising taxes in a recession will never be approved by the people, as you'll be taking more of what they have less of. You can't raise taxes, you can't borrow money -- and because the budget had to be balanced every year, you can't pull from your reserves, since you don't have any.

And there's your contractionary fiscal policy. When you don't have enough money, you limit your costs, even if limiting those costs is a bad idea -- you simply have no choice.

What's the alternative, then? Ideally, you set taxes at a rate that AVERAGES the correct amount for your necessary costs. When your collections exceed your costs, you bank 'em; when your costs exceed your collections, you pull 'em out of the bank.

Easy, right? Trouble is, when there's a surplus, some citizens try very hard to have the government collect less money -- thereby transferring the surplus to themselves, in the form of fewer taxes. And, when there's a shortage, some citizens try very hard to have the government collect more money -- thereby transferring the surplus to themselves, in the form of additional services.

In short, in this scenario, the government can't operate in a fiscally-responsible fashion because of the shortsighted, selfish nature of its citizens. You would think a balanced budget would produce the best possible outcome (balancing taxes and costs), but it won't, because it institutionalizes the selfishness.

By the way, that much-aligned "lock box" approach championed by Gore back in the day would have been exactly the surplus/shortage management bank that I'm talking about here. Oddly, I didn't even think of that until I wrote this explanation...

Answer 3

the problem is entitlements make up 85% of the budget
and often when a budget is passed you hear the term pork barrel politics as every senator / congressman want his pet project included and will kill certain parts of a budget in order to get his pork stuffed in to the budget, this is why we are almost always running a deficit, no one want to cut back, no one wants to scale down, no one, sure some programs are eliminated or cut back but it's usually a trade off for some pork programs that are annually protected by lobbyists and well entrenched congressman / senators, and it's happens on both sides of capitol hill, democrats and republicans alike, so you'll never really see a balanced budget
we will always run a deficit, anotherr big part of it is brought on by trade, the othe big part of it is social security were the well to do senior set has powerful lobbyist who make sure there is no reform in that sector, no one running for re election dares to mess with it or it's the death knell of their political careers

There was the Gramm-Rudman-Hollings Balanced Budget Act.

Senators Ernest Hollings (D-South Carolina), Warren Rudman (R-New Hampshire) and Phil Gramm (R-Texas) were the chief sponsors. The Acts were aimed at cutting the budget deficit, at the time the largest in history. They provided for automatic spending cuts (called "sequesters") if the deficit exceeded a set of fixed deficit targets. The process for determining the amount of the automatic cuts was found unconstitutional in the case of Bowsher v. Synar, 478 U.S. 714 (1986) and Congress enacted a reworked version of the law in 1987. Gramm-Rudman failed, however, to prevent large budget deficits. The Budget Enforcement Act of 1990 supplanted the fixed deficit targets.

Balanced budgets did not actually emerge until the late 1990s, after Republicans took control of the House of Representatives under a platform that included promises to balance the budget. Some credit for the balanced budgets have also been attributed to a long period of economic growth and the significant income tax increases under Presidents George H. W. Bush

Answer 4

pretty simple.. during a recession, people and industries make less money, which means the government collects taxes, so theyd have to cut back so they dont spend money than they take in from taxes

that's exactly why the shouldnt pass such an amendment- it would create a vicious cycle screwing up money flow and through the country into an economic depression