Balanced Budget Amendment Poses Threat to U.S. Economy

This morning, the House Policy and Legislative Oversight Committee will hear sponsor testimony on House Joint Resolution 7, a resolution calling for a constitutional convention to ratify a balanced budget amendment to the U.S. Constitution. The balanced budget amendment (BBA) requires the federal government to balance its budget yearly, except in cases of “national emergency.”

This amendment, if it were to be ratified, poses series economic harm to the nation by stripping the federal government’s ability to respond appropriately to economic downturns and protect businesses and workers.

At the core of this issue is a fundamental misunderstanding about the federal government’s budget and its relation to the national economy and the states. The amendment is meant to prevent the federal government from spending more than it collects in revenue in a single year. In practice, this is very dangerous.

Currently, when the economy weakens, tax revenues for the federal government drop and may even contract due to people being out of work. As unemployment increases, government costs for programs like unemployment insurance, food stamps, and Medicaid increase. These increased costs are referred to as “automatic stabilizers” because these programs put money in consumers’ pockets that they will spend in the economy thereby stabilizing, or weakening, an economic downturn. These costs also cause short-term deficits, because they require the government to spend more than it collects in revenue. However, once the economy returns to its normal cycle these deficits should be erased.

The reason the BBA is a threat to America’s economy is that it eliminates the federal government’s ability to mitigate economic downturns through the use of automotive stabilizers. It requires the federal government to either cut spending elsewhere or raise taxes to pay for the cost of these programs – the opposite of sound economic policy. Taking these tools away from the federal government will result in a less stable economy and exposes businesses and workers to greater risk. MacroAdvisors, a highly respected economic forecasting firm, estimated that unemployment in 2012 would have been twice as much had the BBA been the law.

For these reasons, economists and budget experts across the political spectrum have for years renounced the idea of the BBA and consider it a misguided policy. In fact, in 1997 when Congress was considering a balanced budget amendment, more than 1,000 economists, 11 Nobel laureates signed a statement condemning the proposed amendment, calling it “unsound,” “unnecessary,” and “mandating perverse action in the face of recessions.”

Bottom line: Ohio legislators should not confuse ideology with responsible policy making. In fact the opposite is true – this amendment is a grave risk to Ohio businesses and workers and takes away existing tools to protect our nation’s economy and lawmakers should oppose it.