An Unbalanced Budget Amendment?

Earlier this week, I read a fascinating post on the blog “Marginal Revolution,”  by Alex Tabarrok, an associate professor of economics and the Bartley J. Madden Chair in Economics at George Mason University.  He wrote about the possibility of an unbalanced budget amendment to the Constitution.


What is the unBalanced Budget Amendment?

He had a fascinating economic idea.  Instead of instituting a Balanced Budget Amendment (BBA) in the United States, we should institute an unBalanced Budget Amendment (unBBA).  Here’s how it would work:

“A simple version of the unBBA requires surpluses but more generally the rule would be a surplus or a similarly sized reduction from the previous year’s deficit. The size of the required surplus/deficit reduction would be tied to a function of current and recent GDP growth rates.”

Economists agree that the American economy is cyclical.  Every 5-10 years, there’s a recession, a correction.  In those years, the government doesn’t bring in as much revenue as in the good years.  Therefore, in order to keep our government from fluctuating wildly in size, based upon the revenues that are brought in, we ought to run surpluses in the good years, in order to allow us to pay for government without borrowing in the lean years.

Does this sound familiar to anyone?  Well, there’s a biblical story that goes along the same lines:

“Let Pharaoh proceed to appoint overseers over the land and take one-fifth of the produce of the land of Egypt during the seven plentiful years.  And let them gather all the food of these good years that are coming and store up grain under the authority of Pharaoh for food in the cities, and let them keep it.  That food shall be a reserve for the land against the seven years of famine that are to occur in the land of Egypt, so that the land may not perish through the famine.” –Genesis 41:34-36

Advantages of the unBalanced Budget Amendment

What are some advantages of the unBBA?

  • “The virtues of such a rule are that it allows for counter-cylical fiscal policy during a recession. Indeed, it reduces the cost of counter-cyclical fiscal policy because it guarantees a reserve fund for just such emergencies.”
  • The United States won’t be as dependent on debt to finance our government through recessions.  I’ve written previously about the consequences of debt on our economy.
  • We can save money to pay for natural disasters, which was one of the concerns that some on the left have about the Balanced Budget Amendment.
  • The unBalanced Budget Amendment allows for deficit spending during a recession, while it requires surplus spending during normal times.  Whether or not we have deficit spending or surplus spending is determined by the previous year’s GDP growth.

How unBalanced?

How much would the imbalance in the budget be?  It could vary.  The Bible recommended 20% of the agricultural economy be saved, but that was for what was described as a debilitating famine/drought.

Sweden has such a requirement for their budget.  Their government has been required since 2000 to budget for a 1% surplus over the business cycle.  Since implementation, they’ve successfully balanced their budget and created a surplus.  Chile also has its own version of the unBBA.

Question: Do you think the U.S. could operate under an un-Balanced Budget Amendment?  What impediments do you foresee in implementing such a law?

  • Broc Middleton

    As always the devil is in the details…Republicans don’t want taxes and Democrats don’t want dramatic cuts to the social safety net, how do you get around this? 

    If you are proposing compromise along the lines we dicussed before 20-22% speding in relation to GDP, exceptions for war and natural diasters, and a simple majority vote for cuts and revenue increases, then I could see myself supporting something like that but I would need to see the details. 

    Do you really see the ability in Congress to reach a deal like this? I don’t, not before 2012 for sure.  Republicans are too worried about breaking a tax pledge instead of the American people. 

    • Robert Ewoldt

      I agree, Broc, that the devil’s in the details. I think the unBBA would solve the problem of natural disasters, etc, because we’d basically be creating a rainy-day fund for things like that.

      I don’t see Congress being able to pass this before 2012, but it could after that. I think there’s enough people that are concerned with where the government is at, and open to a suggestion like this, that it could be passed.

      In terms of the details, I would still be open to what we said before. However, I’m thinking about writing a blog post in the near future about the feasibility of balancing the budget at 20-22% of GDP, because history has shown us that even with top tax rates raised through the roof, government revenues won’t support a budget at 20-22% of GDP. So, either we raise taxes on everyone, including the middle and lower classes, to raise revenue to the 20-22% of GDP level, or we continue deficit spending to support our level of government, which I think most people agree is unsustainable.

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