Each year since winning control of the House of Representatives in the 2010 elec

Question

Each year since winning control of the House of Representatives in the 2010 election, Tea Party Republicans have argued that we need to immediately initiate sharp reductions in government spending and entitlement programs and rapidly move towards a balanced budget, (although they have never actually produced a budget proposal in which tax revenues would match government spending plus entitlement transfers). Many Democrats, while arguing that tax rate increases on high income earners need to be part of the any deficit reduction program, have agreed that we need to initiate budget deficit reduction now.

A) What is the argument against attempting to balance the Federal Government budget rapidly at the present time via either deep cuts in Federal Government spending or sharp increases in federal income tax rates?   

B) Does this argument imply that budget deficits don’t matter in the long run? If not, why might the impact of large deficits predicted in the long run under current tax and spending programs be different than the impact today? Explain.

Explanation / Answer

--- A Balanced Budget amendment is highly ill-advised to address the nation's long-term fiscal problems. The argument against is that it would cause economic harm and raise a host of problems for social security and other federal vital functions. It would raise serious risks of capping weak economiies into recession, and making it longer and deeper. Instead of allowing the automatic stabilizers like low tax collection and other benefits to cushion an economy, the amendment would force policyholders to reduce spending and increase tax or both. This will weaken the economy and would lead to higher deficits.

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Not all deficit budgets are bad, if fact recent deficits accelerated recovery from the recession, but long-term deficits of the present magnitude are harmful. This would increase indebtedness to foreigners which is risky and expensive. At present, the United States is the second largest net debtor in the world. If foreigners lose confidence, their investment in the country would diminish bringing down the value of dollars, and raise the prices for imported goods. Ultimately, this could increase interest rates and also lead to a further financial crisis.

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