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Arnold Kling on Tying Government’s Hands to Balance its Budget

Posted By Don Boudreaux On January 22, 2013 @ 12:48 pm In Budget Issues,Debt and Deficits,Other People's Money,Politics,Reality Is Not Optional,Seen and Unseen,State of Macro | Comments Disabled

Inspired by a song made famous by Tennessee Ernie Ford [1], the always-insightful Arnold Kling argues in favor of a policy dear to the heart of Tennessee native Jim Buchanan, namely, a balanced-budget amendment to the U.S. Constitution [2].  In the course of making his argument – in which he uses work by my long-ago NYU acquaintance Marc Joffe, as well as work by Bob Murphy – Arnold explains why the Keynesian case against such an amendment fails.  A slice:

In short, giving governments the discretion to run deficits does not work out well. In theory, government is supposed to fight recessions with deficits, which should then be replaced during normal times by balanced budgets and surpluses. In practice, deficits do not necessarily have the expansionary effects predicted, nor does deficit reduction necessarily exhibit contractionary effects.

To summarize part of Arnold’s argument with my own spin: Even if we grant, for the sake of argument, the dubious proposition that Keynesian economics is correct in showing that deficit financing can be an effective and appropriate policy for saving economies from recessions, a more-complete science of economics suggests strongly that it is nevertheless highly unwise to permit government to run deficits to save economies from recessions.  The reason is that both the science of public choice [3] and the history of government fiscal practices – across both time and territory – reveal that government cannot be trusted to use discretionary fiscal policy wisely.  This latter point, of course, is the chief theme of Jim Buchanan’s and Dick Wagner’s important 1977 book, Democracy in Deficit [4].

It is high time that those of us who have a more-realistic and less-romantic understanding of the logic of politics start more forcefully to insist that if anyone in this battle over appropriate fiscal policy is unscientific or faith-based, it is the Keynesians – whose theory of the determinants and role of aggregate demand might or might not be valid, but whose theory of government behavior most certainly amounts to nothing more than praying to the state to behave only nonpolitically and in accord with the scientific dictates of Keynesian theory.  Such a ‘theory’ of state behavior, of course, is no theory at all; it is merely a naive hope or a faith immune to reason and facts.

While I, too, favor a balanced-budget amendment, I’m not as optimistic about its potential benefits as is Arnold.  But I’ve no time now to make this post longer.

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URLs in this post:

[1] a song made famous by Tennessee Ernie Ford: http://www.youtube.com/watch?v=Joo90ZWrUkU

[2] Arnold Kling argues in favor of a policy dear to the heart of Tennessee native Jim Buchanan, namely, a balanced-budget amendment to the U.S. Constitution: http://www.american.com/archive/2013/january/16-tons-of-keynesian-economics

[3] the science of public choice: http://www.econlib.org/library/Enc/PublicChoice.html

[4] Democracy in Deficit: http://www.amazon.com/Democracy-Deficit-Collected-Works-Buchanan/dp/0865972281/ref=sr_1_1?s=books&ie=UTF8&qid=1358115911&sr=1-1&keywords=buchanan+wagner+democracy+deficit

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