Do we need a balanced budget?

Ronald Reagan once quipped that “the nine words Americans fear most are ‘I’m here from the government’ and ‘I’m here to help.’” Unfortunately, it seems that this quote fits perfectly in today’s fiscal situation, as more and more Americans are becoming increasing scared of the looming federal debt, which has grown tremendously over the past six years. In March 2006, the United States Congress passed a bill to raise the nation's debt ceiling to $8.96 trillion. On September 28, 2007, merely eighteen months later, Congress passed a law to further raise the debt ceiling to $9.815 trillion, this raise will be the fifth time the debt ceiling has been increased since Bush’s administration. Given that the national debt is continuing to skyrocket with no signs of receding, many senators and representatives have been calling for balanced budget amendment to the Constitution to force Congress to maintain fiscal responsibility. Therefore, we must ask ourselves the crucial question: “Does the federal government need a balanced budget?” While the current federal fiscal situation is unacceptable, the answer to this question is a resounding no. We can better examine this answer by delving into the following three areas of analysis: first, the harms of an increasing debt; second, the prevention of the use of deficit spending; and lastly, the increased likelihood of default.

First, it is important to establish why the federal government even needs to bother with reducing its federal debt. After all, the government is almost always in debt and nothing bad has happened. Fiscal responsibility is a crucial component of promoting the general well-being of Americans. When the federal debt increases, the American public experiences a slew of negative impacts. David Lazarus, selected journalist of the year by the Northern California Society of Professional Journalists and the Consumer Federation of California, reported in the Los Angeles Times of September 23, 2007 that “the nation's debt load will almost certainly result in … higher interest rates” for private borrowers. This impact is one of the many negative consequences of increasing federal debt and is particularly harmful considering that an increase in interest rates would reverse the Federal Reserve’s expansionary monetary policy, as indicated by its reduction of interest rates in mid-September 2007, as the CNN of September 22, 2007 reports. Therefore, the national debt must be significantly reduced.

However, a balanced budget will hurt Americans. As the Economist of October 1, 2007 notes, a balanced budget in the United States would hamper the government’s inherent duty to “promote the general welfare” of the people. This fundamental goal of the government is established in the Constitution’s preamble. Former Treasury Secretary Robert Rubin stated in the March 1997 edition of the Congressional Digest that a balanced budget prevents the government from engaging in deficit spending during times of economic slowdowns, turning “slowdowns into recessions, mild recessions into worse ones, and bad recessions into depressions.” If it were forced to have a balanced budget, the government would increase economic distress and unemployment during recessions. Furthermore, as the CNN of September 2, 1997 reports, a balanced budget would force the government to be unresponsive during a time of crisis. “For example, in September 1989, Hurricane Hugo struck the Carolinas, causing billions of dollars of damage. After President Bush [Sr.] declared a major disaster, Congress took action by appropriating $2.7 billion in emergency supplemental assistance to help the area rebuild. Under the balanced budget amendment, if the budget were otherwise in balance, this could not be done until after a vote of 60 percent of both houses.” In more current example of how a balanced budget would have been disastrous is with Hurricane Katrina, had we had a balanced budget, we would not have been able to financially help after the wake of hurricane’s destruction.

Lastly, a balanced budget will increase the likelihood of a national default. As a economist for the Federal Reserve reported in the Chicago Federal Reserve newsletter, “limits on our flexibility [to spend past our budget] would increase the risk of default on the Federal debt. The possibility of default should never be on the table. Our creditworthiness is an invaluable national asset that should not be subject to question.” Indeed, a default on the payment of our debts would undermine our credibility with respect to meeting financial commitments, and that in turn would have adverse effects for decades to come.” The reason why a balanced budget would have a reverse effect on limiting our chances of defaulting is because a balanced budget forces the government to not borrow money past a certain point, even if the government would default on a debt if it did not borrow that money. The inflexibility of a balanced budget clearly hurt the American government in the long run.