Balanced Budget Amendments- BAD Idea

As part of the debt limit game, Republicans have been pushing for a balanced budget amendment.  Mark Thomas has a good blog post where he deals with the problems that come with requiring states to run balanced budgets.  The same logic applies to the federal budget, but even more so.  The explanation for it is simple.

Balanced budget amendment talk is dangerous because it sounds so reasonable-- spend what you take in, and you'll never run into deficit problems.  Sounds really smart, and really responsible.  But, on the merits, it's a profoundly dumb idea.  To figure out why, all you need is to think through the logic of economic downturns.  A recession, by definition, means that the economy contracts.  That means less production of goods and services.  Which, in turn, means less tax revenue flowing into governemnt coffers.  Since the economy is contracting, workers have already been laid off.  This, in turn, means more government spending, as automatic stabilizers like unemployment insurance pay out more money to the greater number of unemployed.  But, since tax revenue has dropped, government is actually taking in LESS money.  Now, textbook economics tells us the next step is for the government to borrow money for two reasons: first to fill the gap in tax revenue caused by the economic contraction, and second to put people the private sector has laid off back to work by investing in public projects that will improve productivity in the future (for simplicity's sake, I'm ignoring monetary policy here, though that certainly has a role to play), once private sector employment recovers.

But with a balanced budget amendment, this process gets short-circuited.  Once tax revenue decreases, the government, instead of filling the gap with public spending, has to cut public employees to stay within budget.  But this means even more employees are out of work, which means even more unemployment insurance payouts and the like.  Before you know it, you've got a vicious cycle of unemployment forcing cuts, which drive up unemployment further and spur more cuts.  Add other factors to the picture (problems servicing debt, and the like), and you get an even uglier economic picture.

So how do we avoid this spiral? Again ignoring monetary policy, the simple solution is by ramping up spending and running deficits in the short run.  Once the slump expires, the government should be able to afford to cut back.  Indeed, if the logical conclusion of Keynesian policies is followed, government should be running slight surpluses at full employment, and deploying those surpluses during downturns.  But the consequences of tightening fiscal policy during downturns are WAY worse than the consequences of failing to run surpluses during booms (largely because the economy's natural rate of growth means that a small deficit in the face of a booming economy can still coexist with a shrinking debt burden; i.e. if the economy is growing at 3% a year and the primary account deficit is 0.5% a year, GDP is growing much faster than debt, so the ratio of debt as a percentage of GDP is shrinking).