House Rejects Balanced Budget Amendment that could Double Unemployment during Recessions

A report from Macroeconomic Advisers, one of the most respected economic forecasting firms, concludes that unemployment would rise from 9 percent to 18 percent in 2012 if Congress had to cut spending to comply with the type of constitutional balanced budget requirement that Republicans and some Democrats tried but failed to pass today.

Most mainstream economists agree that the last thing the federal government should do during a recession is cut spending. Reducing government jobs, or cutting government programs that maintain consumer spending in a way that indirectly creates jobs, is the last thing we need when the economy is already contracting. But that’s exactly what would happen under a balanced budget requirement.

Recessions often cause budget crunches because they reduce revenues (because fewer people and businesses are generating income and paying taxes) and increase government spending (because more people receive unemployment insurance and other benefits). These automatic reductions in taxes and increases in spending can stabilize the economy to an extent. But a balanced budget requirement would make it far more likely that Congress would respond to a recession-induced budget crunch by slashing unemployment insurance and other programs that help offset the economic contraction.

That’s why Macroeconomic Advisers found that if Congress had to cut spending to balance the budget in 2012, another 15 million people would become unemployed and economic growth would drop from an expected 2 percent to negative 17 percent.

Such a proposal would seem too outrageous to even be discussed seriously —  except that a majority of the House of Representatives just voted for it. (The measure thankfully did not receive the two-thirds vote requires for approval of a constitutional amendment.)

The version considered today would not take effect for five years, but it’s important to remember that even the most conservative deficit-reduction plans discussed today would not result in a balanced budget for decades. And America will undoubtedly face recessions in the future when the balanced budget requirement would be in effect.

Citizens for Tax Justice has joined 275 other national organizations on a letter to members of Congress blasting the proposed balanced budget amendment as, to borrow the term used by Macroeconomic Advisers, “catastrophic.”

And just in case you were wondering, the balanced budget amendment considered today was the less extreme of the two versions that have been discussed lately. The version supported by anti-tax activist Grover Norquist would require approval by two-thirds of both chambers of Congress to pass any revenue increase, ensuring that efforts to balance the budget during recessions would definitely be done entirely through spending cuts and have the effects described above. Of course, the fact that a proposal is slightly less extreme than the one preferred by Grover Norquist is no indication that it’s a great idea.

Many lawmakers have apparently decided that they would address difficult fiscal problems with what seems like a simple answer. A rule making Congress balance the federal budget every year probably sounds reasonable to many people until they learn of the horrific consequences. Lawmakers have no such excuse, because they and their staffs are quite aware of mainstream economic research, which this recent report only reaffirms.

Make no mistake; those lawmakers who voted today for the balanced budget amendment have voted to destroy millions of jobs during a recession.