NCPA - National Center for Policy Analysis

Deficits Don't Cure Recessions

January 27, 1997

Treasury Secretary Robert Rubin strongly opposes the Balanced Budget Amendment to the Constitution. His main concern is that it will hamper the government's ability to respond to an economic downturn. While this is a valid concern, it is overstated. Congress can always abandon the balanced budget requirement by a super-majority vote, which it certainly would do in the event of an economic crisis. More importantly, however, there is no evidence that deficit spending has been necessary to recover from past recessions.

It is undeniably true that Congress passes some sort of anti-recession legislation every time there is an economic slowdown. But the history of such legislation is that it always comes too late to do any good. In fact, the date that anti-recession legislation becomes law often corresponds to the very date that the recession ends.

More frequently, the legislation comes well after the recession's trough. And since the actual spending does not come into effect immediately, it has always been the case that anti-recession spending did not have an impact on the economy until long after the recession's end --sometimes many years afterward.

Looking at every major postwar recession as defined by the National Bureau of Economic Research one can see that there is not a single case in which anti-recession legislation was enacted in a timely fashion, so as to mitigate the economic downturn. In fact, one can argue that such legislation may have made matters worse. By overstimulating the economy during upturns it may have sown the seeds of future recessions.

The problem is that for anti-recession spending to work, forecasters would have to see a recession coming. Legislation would have to be enacted into law well in advance, and programs implemented so as to coincide with the beginning of the downturn. These are virtually impossible requirements to meet. Forecasters seldom, if ever, accurately predict turning points in the economy. And if they could, it is doubtful that they would be persuasive enough to convince Congress and the Administration to act in time. And even if they did, it usually takes a year or more to get programs implemented and money flowing.

Thus it is absurd to argue that the Balanced Budget Amendment should be defeated because it will hamstring the government's ability to respond to economic downturns. All recessions really do is give politicians an excuse to enact pork-barrel public works programs in the name of mitigating the recession. If the amendment prevents such wasteful spending it will serve a useful purpose.

Source: Bruce R. Bartlett, Senior Fellow, National Center for Policy Analysis, January 27, 1997.

 

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