The Tea Party

Total outlays for any fiscal year shall not exceed total receipts for that fiscal year, unless three-fifths of the whole number of each House of Congress shall provide by law for a specific excess of outlays over receipts by a rollcall vote. SECTION 2. The limit on the debt of the United States held by the public shall not be increased, unless three-fifths of the whole number of each House shall provide by law for such an increase by a rollcall vote. SECTION 3. Prior to each fiscal year, the President shall transmit to the Congress a proposed budget for the United States Government for that fiscal year in which total outlays do not exceed total receipts.

Which rose to some political prominence in the United States in 2010, campaigned in favor of a balanced-budget amendment as well. In July 2011, the House of Representatives passed HR 2560, called the Cut, Cap, and Balance Act, which (among other things) called for a constitutional amendment to balance the budget to be transmitted to the states for their consideration. [3] This bill was not passed by the Senate. Whether this political activity will ever generate a constitutional amendment remains an open question and a point of debate in the 2012 election. The discussion of constitutional limits on budget deficits is not limited to the United States. In 2009, Germany amended its constitution to limit federal budget deficits to 0.35% of GDP by 2016. This limit applies when the German economy is operating near its potential output. The regulations allow the German government to run deficits during recessions but require surpluses in times of high economic activity. [4] Should the government be forced to balance its budget each year, as such measures suggest? There are certainly good reasons why households sometimes incur debt—to pay for a house, a new car, or advanced education. Perhaps the same is true of governments. We should not presume that deficits are harmful without first trying to understand why they occur. Others have even argued that deficits are neither good nor bad but are simply unimportant. Indeed, Vice President Cheney is reported to have said that “[President] Reagan proved that deficits don’t matter.” [5] So are deficits bad for the economy, good for the economy, or just irrelevant? Our goal in this chapter is to understand the economic effects of government budget deficits so that we can evaluate competing claims such as these and ultimately help you answer the following question.