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Premier Business Advisory Group Says Balanced Budget Amendment a Disaster

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Over the last several years, I’ve learned to ignore what politicians and highly partisan think tanks say. I’ve learned they’re not really trustworthy or truthful.

As Bruce Bartlett, one of Reagan’s top economic advisers, wrote a year or so ago: all too often politicians and partisan think tanks decide on a result they want, then work back to reinforce that conclusion, coming up with thin data to reinforce the conclusion they want. Now, not all think tanks work this way. Certainly, Brookings and Urban Affairs, the Bipartisan Policy Center, and the Tax Policy Center do legitimate research and provide exemplary results.

Another of those great non-partisan advisers is Macroeconomic Advisers. Macroeconomic Advisers, which provides nonpartisan analysis to major corporations and government entities such as the President’s Council of Economic Advisers (under Presidents of both parties) and the Congressional Budget Office, also concludes that under a balanced budget amendment, “recessions would be deeper and longer,” and uncertainty would be cast over the economy that could retard economic growth even in normal economic times.

Here’s what they said:
– Macroeconomic Advisers writes that if a constitutional balanced budget requirement had been ratified in 2008 and took effect in fiscal year 2012, “The effect on the economy would be catastrophic.” If the 2012 budget were balanced through spending cuts, those cuts would have to total about $1.5 trillion in 2012 alone, which the report estimates would throw about 15 million more people out of work, double the unemployment rate from 9 percent to approximately 18 percent, and cause the economy to shrink by about 17 percent instead of growing by an expected 2 percent.[1] These results, the report explains, would occur in part because “[t]he Fed would be near powerless to offset this huge fiscal drag” and “[n]o model could capture the ensuing chaos and uncertainty, which would make matters far worse.”

– Macroeconomic Advisers also notes that a balanced budget amendment would create great uncertainty because it would be unclear whether the balanced budget requirement would be enforced or suspended during a recession. “The pall of uncertainty cast over the economy if it appeared a BBA could be ratified and enforced in the middle of recession or when the deficit was still large would have a chilling effect on near-term economic growth.”

– Macroeconomic Advisers concludes that “the only way to implement a BBA without some fiscal drag is to ratify it when the budget is in balance or surplus. Of course, then we wouldn’t have needed the BBA to achieve balance in the first place.” Moreover, even if a BBA went into effect when the budget happened to be in balance, it would be economically undesirable.

The report observes that, even under this best possible circumstance, placing a BBA in the Constitution would create “new and powerful uncertainties,” in part because “[t]he economy’s ‘automatic stabilizers’ would be eviscerated” and “discretionary counter-cyclical fiscal policy would be unconstitutional.” “We believe,” Macroeconomics Advisers writes, that “this would change cyclical dynamics. Recessions would be deeper and longer,” and the uncertainty by itself could “retard economic growth” even during normal times.

The Macroeconomic Advisers analysis indicates that any version of the balanced budget amendment would do significant harm to the American economy, a view that mainstream economists broadly share.(emphasis mine)

It doesn’t take a great genius – well, maybe it does – to figure out that a BBA is antithetical to a stable and growing economy. Yet, the GOP continues to push it. Every GOP presidential candidate has stated publicly and in debates that they support the BBA currently being pushed by the GOP. Given the analysis by Macroeconomic Advisers, either these candidates are economically illiterate or they are pandering to an economically illiterate base.

I’m not sure which is worse from these candidates: that they fail to understand macroeconomics or that have chosen not to educate the GOP base.

Presidents and legislators should know more than average, busy, hardworking voters. After all, the main reason we hire these people is for their expertise, not because they’d be great pals over a beer at a backyard barbeque.

Editor’s note: Do the nation a favor, pass this information along to your friends and colleagues.

Links:

Macroeconomic Advisers on BBA

CBPP Macroeconomic Advisers Appendix

Reagan Adviser Bruce Bartlett’s Wall St Pit column on the BBA

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