I think I like this Idea

Alex Tabarrok proposes an “Unbalanced” Budget Amendment.

The main argument against a balanced budget amendment is that it makes it more difficult to engage in Keynesian counter-cyclical fiscal policy…

The unbalanced budget amendment is a requirement that in good times the government must run a budget surplus. 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 unBBA is thus a type of automatic stabilizer of the kind I have argued for before (e.g. here).

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.

Notice that while making counter-cyclical fiscal policy easier the unBBA would tend to create budget balance as surpluses in good times were spent in bad times. Thus over a period of time the unBBA has similar results to a BBA. By requiring surpluses (and thus taxes) to be high(er) in good times, however, … in bad times the unBBA has a lower cost and a better chance of being passed than the BBA.

Thoughts?

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About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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17 Responses to I think I like this Idea

  1. Pinky says:

    I want to know the thinking that promotes a national debt in the first place.

    Forget all the talk about balance and limits. Why don’t we impost an excise* tax on adjusted net income for the sole purpose of retiring the debt?

    * excise taxes are imposed for the duration of the problem involved.

  2. Michael Heath says:

    I don’t like either but prefer this approach. For example, when Reagan first entered office it was prudent that The Fed and the federal government lean towards contractionary measures in spite of being in a recession. In addition I think history will reveal that it was error to reduce the annual structural deficit in the 1990s rather than invest in transforming our supply of labor given the emergent global marketplace, the reduced number of traditional-style opportunities America can win because of increased competition, coupled to new opportunities we’ve failed to sufficiently exploit because we lacked a sufficiently competent labor pool.

    I’d instead like to see some non-partisan interest group start rating demonstrated capabilities where politicians get a rating which is heavily considered by voters. Popular to the point politicians would volunteer to take a broad-ranging competency test in hopes good scores would provide them an electoral and even governing advantage. This doesn’t necessarily reveal my bias towards a more technocratic government since I don’t think it would be prudent to have elected officials who were all economists, these tests would have to allow for great scores from generalists, but instead measure whether they’ve at least boned-up enough to work with subject-matter experts. Some economists in both parties would be nice however.

    I mostly tend to perceive most of our challenges having fairly obvious root causes and therefore easy solutions* and simple systemic preventative fixes, i.e., our problem is one of having under-qualified elected officials and a political environment where will is lacking. E.g., fixing Social Security appears to be a very easy math problem with some attendant non-controversial policy positions to make the math easier to swallow, like MI’s Gov. Snyder is recommending when it comes to recruiting more professional immigrants which would increase the number of workers to beneficiaries and with higher incomes at that.

    * “Normally”, the challenges the state of Michigan and the 2009 federal government face were/are daunting. But those challenges also are the result of ignoring defects well-understood and known about for decades, e.g., globalism, energy, education, and health care coupled to the transformation of American conservatism into a religious-political cult.

  3. Pinky says:

    I might be simple minded; but, what about this.

    Retiring the debt would mean that 40% of our budget would be released to pump back into the economy.

    What is there about that that doesn’t make sense?

  4. D. C. Sessions says:

    The devil is in the details. Bearing in mind that questions of scientific, historical, and economic fact have become partisan issues, I see no reason to hope that declarations of “good times” and “bad times” won’t manipulated for partisan advantage.

    Also, as a long list of blogging economists have pointed out, the last few years have spectacularly demonstrated what happens when the political winds blow against sensible economic policy. The fiscal and monetary tools may all be in place (as they have been in Europe) and still the lack of political will to use them produces results such as we’re seeing in England right now. (Or for that matter the concerted “see no evil” refusal to intervene of the Fed in the buildup to the crash.)

    That so, I’m inclined to prefer the suggestion that we need relatively autonomous fiscal stabilization mechanisms much as the Fed is a relatively autonomous monetary mechanism. The “infrastructure bank” being one example: a fund with dedicated income stream which runs surpluses in times when rates are high, unemployment low, and cost of infrastructure (however defined) high and which takes advantage of depressed costs during recessions to undertake infrastructural projects. Doing this with transportation infrastructure would be almost trivial since the gasoline tax is already an earmarked funding source.

    Put that way, it’s just good business.

  5. Janicot says:

    Sorry — I feel like ranting. Maybe I’m just simple minded. But on the one hand this discussion is interesting while on another level this strikes me as so many meaningless buzzwords. All through GWB’s term I tried to talk to my (very Republican) family about why the country was spending too much on the Iraq war (especially lacking a good reason to be there) and their answer was always ‘but it’s necessary to protect the country’.
    I’ll show my ignorance here. We can talk about the BBA or the unBBA (which is at least closer to rational sense) but what’s to stop Presidents/Congresses from just taking it back off-budget again as soon as some (real or imaginary) national crisis appears?
    I guess I’m nihilistic, but while our ignorant populace keeps electing irrational politicians, I don’t see any path away from constant political bickering between fanatical ideologues and a more rational few(?) in DC. This country has allowed too may wingers into positions of power who are perfectly willing to drive the country off the cliff if their personal issue isn’t going the way they’d like. (From my point of view, health care and abortion are obvious examples). I’m afraid that until IQs in this country magically rise, we can do nothing but lurch from one crisis to another beating back extremists who’ll try to use whatever is current to promote their personal agendas. /rant

  6. Michael Heath says:

    Janicot,

    I don’t see your comment post as a rant. I also agree with you. From my perspective incompetent legislation coupled to incompetent administration will lead to bad consequences. Debating some type of balanced budget amendment is a debate about merely containing a symptom while avoiding the critical root cause(s) that has people yearning for budgetary sanity.

    It’s typical to see dysfunctional entities debate how to contain symptoms while revealing no capability of even recognizing the existence of root causes, corrective actions, and systemic requirements to reduce the harm being caused. I was heartened to here the President note that some observers perceive us as dysfunctional; that was one of the highlights of his speech me the other night, i.e., that he recognized a deeper root cause was in play.

  7. I’m 100% in support of Tabarrok’s idea. You can set up budget constraints with triggers to make sure the debt never gets out of control or there is some kind of five-year balance that must be met, that way you can run deficits in tough times and not worry about debt getting out of control. There’s no reason to shoot ourselves in the foot like we are with this debt ceiling business. The real thorn in the side of this all, though, is military spending, which increases when the economy is good and increases or stays the same when the economy is bad.

  8. ppnl says:

    It’s interesting that I have not seen any posts defending government gridlock lately. A dysfunctional government can be far more dangerous than an overreaching government.

  9. Lance says:

    This idea presupposes that Keynesian style deficit spending during “bad” times is a good idea. I’m not saying it isn’t, just that there seems to be some debate among schools of economic thought as to the efficacy of such fiscal policy.

    I think economics is more black art than science but I must also admit to having taken exactly zero courses on the subject. It seems that economists look at past states of the economy and then make up “just so” stories, that while plausible have no empirical way of being validated.

    One of my brother’s in law has a degree in Econometrics. He showed me his research project and asked me for some feedback on the program and it’s parameters. It was basically a collection of coupled linear and non-linear equations. To a physicist it was basically an unbounded chaotic system. Each equation had a different set of boundary conditions and linked data table.

    This kind of system is inherently unstable and unpredictable. So dependent on even the smallest change in initial conditions to render it useless, since the time dependent phase space will fluctuate wildly from unstable state to unstable state.

    I asked him if he thought it reflected reality and if so how would he verify that this was so. He seemed puzzled by the question.

    Your idea seems arbitrary, but as opposed to our current profligate model I guess I’m in.

  10. James Hanley says:

    Pinky–I want to know the thinking that promotes a national debt in the first place.
    If I may be allowed to take your question literally, rather than how you actually mean it, in the first place it was Hamilton’s thinking that having the brand-new federal government take credit for the remaining Revolutionary War debt would build support for it among the states and create credit-worthiness for when it did need to borrow. All quite politically sensible. Now, more to your point, that creditworthiness is valuable because sometimes we do need to borrow. Just as most people find it worthwhile to borrow in order to make big purchases like a house or car, it would strain the U.S. to do pay as we go on all its capital expenses. Just as states often issue bonds to fund new highways, spreading the cost over years instead of trying to pay for it all upfront, or a municipality will issue bonds to build a new high school. The problem comes in when you’re at the point of borrowing to pay your on-going expenses–if you’re borrowing money to pay your mortgage and utilities, you’re in a heap of trouble. You can do it short-term, but not long-term. (Side story: My college had raised about 80% of what it needed to renovate an old gym into a student center, so it decided it had raised enough that it could borrow the rest and move forward. That was a good choice. But one faculty member, believing our salaries needed to be increased, asked why, if they were going to borrow money for a student center, they wouldn’t borrow money for faculty salaries. He didn’t seem to grasp my reply that I wasn’t willing to be repossessed by the bank in case of the College’s failure to pay.

    Janicot–what’s to stop Presidents/Congresses from just taking it back off-budget again as soon as some (real or imaginary) national crisis appears?
    That’s a good question. The danger is that a) nobody has standing to sue them in the courts and/or b) the judiciary calls it a political question and declines to hear the case. The amendment would have to be written to clearly give someone standing–perhaps any member of Congress (at least one will always object) and some specific actionable remedy that can be imposed. The odds of an amendment being passed that allows for such an actionable remedy, however, is pretty slim. So, yeah, good question.

    Christopher– The real thorn in the side of this all, though, is military spending, which increases when the economy is good and increases or stays the same when the economy is bad.
    Why do you hate America, Chris? You know there are only two kinds of legitimate government spending–the military and my goddam mortgage exemption!

  11. D. C. Sessions says:

    This idea presupposes that Keynesian style deficit spending during “bad” times is a good idea. I’m not saying it isn’t, just that there seems to be some debate among schools of economic thought as to the efficacy of such fiscal policy.

    We’ve had a bit of a natural experiment the last few years. Thanks to the Internet quite a few economists are on record with their quantitative projections using (for instance) Hicks’ models. You can look up what those economists were coming up with as far back as 2006 and compare to what actually developed.

    Be careful to make allowances for changes in the factual data as time goes on; for instance up through last month there was a bit of a puzzle over the most recent recession appearing to violate Okun’s Law [1]. The most recent updates on GDP history puts the employment history right on the curve again.

    [1] Bad name, but nobody asked me.

  12. Pinky says:

    So, James, are you telling me that paying down the debt would lower America’s credit worthiness? I don’t think so. America’s economic strength has grown light years beyond where it was in the late eighteenth century. We no longer need to impress potential investors–they clamor to buy our T-Bonds.
    When persons own large amounts of America’s debt, they are assured a return on every penny invested at zero risk. Even so, the interest rates are low. So, it’s good business for them to be able to buy U.S. T-Bonds even if they don’t earn high percentages..
    If the U.S. defaults, there is a strong possibility that the interest rate on T-Bonds will be raised as a result of the chance of non-payment, at least on demand. And maybe just a token 1/2 percent or so. But, American WILL pay its debts even if the interest rates go up.
    I think I smell a rat in there and it has something to do with being a money lender..

  13. Michael Heath says:

    I’d like to pile on James Hanley’s point to Pinky about why a government should generate debt. James alluded to it, I’ll make it explicit – to maximize growth. Wisely leveraging debt allows entities to exploit current opportunities and end up bigger than if they’d first saved a sufficient enough for capital expenditures needed to grow. This is why corporations pay top dollar for financial whizzes to figure out how to structure their balance sheets in terms of the optimal mix of capital and debt.

    I think the federal debt generated in the 1980s, while more than it should have been, was ultimately prudent and did lead to enhanced growth. However I think the record will continue to show that the debt incurred in the 2000s until the stimulus was not prudent and will lead to suppressed future growth. So as always, we shouldn’t look only at the principle but also the wisdom of the decisions within the context of the times coupled to the quality of the execution.

  14. ppnl says:

    This idea presupposes that Keynesian style deficit spending during “bad” times is a good idea.

    Not really. If you can convince them to stop deficit spending during the good times then you have won at least half the battle either way. Anyway if tax receipts take a sudden nose dive there is no reason you can’t borrow until they recover or take a few years to carefully cut spending. It is only when you become addicted to credit that there is a problem.

  15. James Hanley says:

    Pinky, So, James, are you telling me that paying down the debt would lower America’s credit worthiness?

    No! I didn’t mean to convey that idea at all. Rather, that consistently paying debt in a timely manner keeps our creditworthiness high. I think we have too much debt right now because we’ve been borrowing to pay for current spending rather than just for capital investment, and getting away from that profligate model would be good. There are a number of respectable folks who think that–aside from the current debt ceiling issue–our over-borrowing all by itself is a threat to our future credit-worthiness, just because it could create doubts about our ability to repay. I have that concern myself, but empirically there doesn’t seem to have been any sign of it. (One recent bit of speculation I saw suggested that even if investors downgrade their view of the U.S.’s creditworthiness, their current view of other investment opportunities is so dismal that U.S. securities still remain their best bet.)

  16. Matty says:

    Does either proposal really belong as a constitutional ammendment? As I understand it your constitution does two things, sets out the structure of government and sets limits to what laws can be passed in an effort to protect people’s rights. To put in economic policies even at a very general level would seem to blur the line between legislation and constitution, which I’m not sure is a good idea.

    Also as I understand it ammendments are relatively hard and the idea that the government might have defensible reasons for wanting to change borrowing policy without going through the whole process seems more likely than that they would have such reasons for say establishing a national church or deciding that America doesn’t really need a supreme court.

  17. James Hanley says:

    Matty,

    A worthy question, so it’s promoted to post status.

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