Thursday, January 27, 2011

Of Balanced Budgets and Bankruptcies

This was Senator John Cornyn (R-TX) in December, extolling the fiscal responsibility of the states in comparison to the federal government:

"A balanced budget amendment is a good idea, but certainly not a new one. All but one of the 50 states already have some form of a balanced budget amendment in their state constitutions, and we can draw from the experience of the states in drafting an amendment appropriate for the federal government."
-- Senator John Cornyn, December 1, 2010

This was Senator Cornyn this week, explaining what he thinks is needed to rescue those same states:

"Senate Republican leaders said on Tuesday they were considering introducing legislation to allow financially stressed U.S. states to declare bankruptcy ... 'We're exploring that as a responsible option,' Senator John Cornyn, who sits on both the Budget and Finance committees, told reporters."
-- Reuters

After the jump, tying Cornyn's ideas together.

Cornyn's juggling act here shows that a balanced budget requirement is no guarantee of fiscal health for state governments. Such a requirement may even bring on defaults as stresses caused by severe recessions break the budgets of states, forcing retractions in state spending, further aggravating the recession and accelerating a vicious cycle to default.

Imposing such a restriction on the federal government will likewise increase the chances that recessions will turn into depressions. Because in 2008 Cornyn had not yet succeeded in crippling the federal government's ability to react in a financial crisis, our national economy escaped what Chairman of the Federal Reserve Ben Bernanke called "Depression 2.0". According to a study by economists Alan Blinder and Mark Zandi:

"The effects of the fiscal stimulus alone appear very substantial, raising 2010 real GDP by about 3.4%, holding the unemployment rate about 1½ percentage points lower, and adding almost 2.7 million jobs to U.S. payrolls."

So, is a balanced budget amendment really a "good idea?" Only if you want to limit government's ability to respond to recessions. Only if you look back on the Great Depression as a golden age of American history.

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