Economists Oppose a Strict Balanced Budget Rule. Could the US Adopt a Sophisticated One?

TheIGM Economic Experts Panel overwhelmingly opposes a constitutional strict balanced budget amendment.Weighted by the confidence of their answers, 99 percent of responders disagree or strongly disagree that a requirement the federal government balance the books would reduce output volatility; whilst 53 percent disagree with the view that it would lower federal borrowing costs. This is timely. House Speaker Paul Ryan (R-WI) has tasked Rep. Doug Collins (R-Ga.) as part of a22-person strong task force to consider alternative fiscal rules to the debt ceiling to help constrain the growth of US federal government debt. The task force offers its recommendations in December. Whilst the task force ’s remit does not extend to constitutional change, the cost and benefits of different fiscal rules are bound to shape their thinking.Why do economists demur over an ex-post balanced budget requirement that forces balance every year? Two main answers appear. First, there ’s the Keynesian argument that fiscal policy can and should be used to smooth the business cycle, especially via discretionary deficit-spending during recessions. In this view, a balanced budget amendment can exacerbate output volatility by outlawing potentially helpful fiscal support and enforcin g cuts when the economy is in a cyclical downturn. Second, there ’s Robert Barro’s “tax smoothing” argument, which says a government can minimize the distortionary impact of taxation by keeping tax rates relatively smo...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs