Monday, July 25, 2011

Hard Keynesianism Is Not Politically Sustainable

. Monday, July 25, 2011

Alex Tabarrok comes out in support of Hard Keynesianism:

... I propose an unbalanced budget amendment.

The unbalanced budget amendment is a requirement that in good times the government must run a budget surplus. The virtues of such a rule are that it allows for counter-cylical fiscal policy during a recession. Indeed, it reduces the cost of counter-cyclical fiscal policy because it guarantees a reserve fund for just such emergencies. The unBBA is thus a type of automatic stabilizer of the kind I have argued for before (e.g. here).

A simple version of the unBBA requires surpluses but more generally the rule would be a surplus or a similarly sized reduction from the previous year’s deficit. The size of the required surplus/deficit reduction would be tied to a function of current and recent GDP growth rates.


John Quiggin and Henry Farrell argued in favor of this sort of thing for the member states of the eurozone, which I discussed previously here and here. I will just add that most of the US states have a version of this requirement, and it mostly didn't help cushion them from this recession. In other words, this kind of rule is unnecessary for dealing with small recessions, and impossible to uphold during large recessions.

One technocratic argument in favor of an unbalanced amendment would be to prevent the sort of deficit build-up that commonly prefigure financial crises and/or recessions. Thomas may wish to say more about that. In general, I think the answer is that such an amendment will never be passed de jure for the same reason that the policy is not implemented de facto: there is no constituency for it, and there are plenty of constituencies for higher spending and/or lower taxes. States face legal fiscal constraints because everyone understands that in the end the federal government is on the hook, so there's moral hazard. The same dynamic does not apply at the national level.

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Hard Keynesianism Is Not Politically Sustainable
 
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