From Investors Business Daily, Jan. 25, 1995

as cited in the
Congressional Record

A Balanced Budget Myth Bared; Economy Cycles Unlikely To Worsen Under Plan

(By John Merline)

A balanced budget amendment will either restore fiscal sanity to a town drunk on deficit spending or lead the country toward economic ruin.

Those, at least, are the stark terms typically used by supporters and opponents of a constitutional amendment outlawing deficit spending.

And, while passage of a balanced budget amendment is almost a sure thing this year, debates over its merits remain fierce--with critics from all sides of the political spectrum lobbing grenades at it.

Democrats don't like the rigidity it imposes while conservatives fear it may bias Congress towards tax increases.

One of the principal criticisms of the amendment is that it would short-circuit the federal government's ability to fight recessions, either with `automatic stabilizers' or with stimulus spending like temporary tax cuts or spending hikes. Yet there is lit tle evidence to support this view.

`When purchasing power falls in the private sector, the budget restores some of that loss, thereby cushioning the slide,' said White House budget director Alice Rivlin in testimony before the Senate Judiciary Committee earlier this month.< p> `Unemployment compensation, food stamps and other programs fill the gap in family budgets--and in overall economy activity--until conditions improve,' she said, defending the budgetary `automatic stabilizers.'

In addition, because of the progressive income tax code, tax liability falls faster than incomes drop in a recession, slowing the decline in after-tax incomes.

The result, however, is typically an increase in the deficit.

Mandatory balanced budgets would, she argued, force lawmakers either to raise taxes or cut spending in a recession to counteract increased deficits.

`Fiscal policy would exaggerate rather than mitigate swings in the economy,' she said, `Recessions would tend to be deeper and longer.'

Other economists agree with Rivlin.

Edward Regan, a fellow at the Jerome Levy Economics Institute in New York, argued that the amendment would `restrict government efforts to encourage private sector activity during economic slowdowns.'

The assumption, of course, is that these automatic stabilizers actually work as advertised, an assumption not all economists share.

`If anything, I think the government has made economic cycles worse,' said James Bennett, an economist at George Mason University.

Bennett, along with 253 other economists, signed a letter supporting a balanced budget amendment introduced last year by Sen. Paul Simon, D-Ill.

Ohio University economist Richard Vedder agrees. `If you look at the unemployment record, to use that one statistic, it was more favorable in the years before we began automatic stabilizers than in the years since,' he said.

Much of the countercyclical programs were implemented in the wake of the Great Depression.

Unemployment data show that in the first three decades of this century the average jobless rate was roughly 4.5%.


In the four decades since World War II, the rate averaged 5.7%. And, from 1970 to 1990, it averaged 6.7%.

In addition, some of the stabilizers may actually keep people out of the work force for longer periods of time, possibly prolonging economic slumps.

A 1990 Congressional Budget Office study found that two-thirds of workers found jobs within three months after their unemployment benefits ran out--suggesting that many could have found work sooner had they not been paid for staying home.

Other data suggest that, at most, federal fiscal policy has had only a small stabilizing effect on the economy, despite the sharp increase in the economic role played by government.

A study by economist Christina Romer of the University of California at Berkeley found that economic cycles between 1869 and 1918 were only modestly more severe than those following World War II.

THOMAS: Legislative Information Service
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