Thursday, February 28, 2013

I am skeptical about a balanced budget amendment.

I don't believe that the family budget is a good metaphor for the federal budget, but I will use it now anyway.

It seems to me that there are different ways that debt can be acquired:

  • You can borrow to invest, and it makes sense to do so if the investment will be profitable and suffice to more than pay back the money borrowed, the interest, and a profit.
  • You can borrow to pay for something you absolutely need, but can't pay for from savings and current income, such as care for an acute medical problem.
  • You can borrow for convenience, as one borrows from a bank by using a credit card, and they paying the credit card bill. It makes sense to do so if the convenience is worth the cost of the credit card transaction (and the inconvenience of paying the bank's monthly bill.)
  • You can borrow to buy something you want, don't need, and can't afford. This is not a good idea.
By analogy, the government can borrow:
  • To build roads or facilities or to locate and evaluate natural resources
  • To conduct a just war with costs beyond those affordable from current taxes
  • To cover immediate expenses for which the required income will be delayed
  • To pay for tax breaks for rich influential people who don't need them or wars that shouldn't be fought.
It might make sense to separate the federal budget into an investment budget and a current account budget. Investments would be allowed into the investment budget if and only if they were justified by cost benefit analysis or imperative need such as borrowing for a just war.

The current account budget would include the other classes of expenditures. Even in this case it seems to me that government stimulus is sometimes justified in economic turn downs, so while normal expenses should not be paid from borrowing as a general rule, and since stimulus funding should be paid from income in flush times, some borrowing for the short term is justified.

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