Balanced Budget Amendment is a Bad Idea

David Leonhardt in Economix blog lays out nicely that while we very much need to address our long term fiscal imbalance, a balanced budget amendment is a terrible idea. We need to be able to run a deficit in times of emergency (war, economic), and indeed could sustain a small annual deficit in perpetuity. We have had a very large deficit the past few years due to the economic emergency, and we will have very large ones going forward even if the economy returns to normal primarily due to the joining of the demographic reality of the baby boomers with our nation’s generalized health care cost problem (Medicare), and the fact that our current tax receipts are far below our aggregate default spending levels.

Two-thirds of the federal budget is comprised of 5 line items: Military, Social Security, Medicare, Medicaid and Interest on the debt.  If we extend our current tax code for another decade, then we will have deficit in 2020 even if we eradicate ALL federal spending other than these 5 line items.

Over the long run, taxes will have to rise and spending will have to fall as compared to current default levels of both if we are to move toward a sustainable federal budget.