Without a taboo against deficits, deficit spending tends to become habitual. It is politically corrosive, because no constituency expects to be the one to have to sacrifice when the limits of borrowing have been reached.
The main argument against a balanced budget amendment is that it would tie the hands of Congress in dealing with economic downturns. Keynesian orthodoxy says that deficits are appropriate in a recession. The orthodox Keynesians are both loud and numerous within the economics profession. However, they may be wrong. Below is a list of reasons.
1. The historical record does not clearly support the Keynesian view. There are many instances in which fiscal expansions did not produce economic expansions and in which fiscal contractions did not produce economic contractions. For example, see some of the literature cited in a recent article by Robert Murphy, particularly footnote 5.
2. The macroeconometric models that are trotted out to support Keynesian policies are highly suspect. (See “The Soothsayers of Macroeconometrics.”)
3. The Keynesian rationale for deficits would imply that when the economy is not in recession, a balanced budget or surplus is in order. However, the United States has run deficits nearly every year since the Keynesian framework was adopted in the 1960s.
4. As is well known, the Congressional Budget Office projects increasing deficits starting in about 10 years, as the full force of Baby Boom retirements hits the budget. From there on, the CBO projects ever-widening deficits. Yet no Keynesian is coming forward to suggest that perpetual deficits are appropriate. We are not always going to be in a recession. Why is there no plan to balance the budget?
5. Technically, according to the National Bureau of Economic Research Business Cycle Dating Committee, the most recent recession ended in June 2009. In theory, the rationale for deficit spending ended on that date as well. Of course, economic conditions today are not very satisfactory. But if it is necessary to run deficits whenever conditions are “not very satisfactory,” when will we not run deficits?