The End of Balanced Budgets

Briefly, during the Clinton-Rubin years, politicians not only talked

about balancing the budget; they also actually did it. Those days are

now over. No Republican president has shown any inclination whatsoever towards

balanced budgets: the allure of further tax cuts is always too great. And now

the consensus among Democrats, too, is very much that balancing the budget is


Paul Krugman had an influential

column last December in which he said that, for political rather than economic

reasons, the Democrats shouldn’t bother balancing the budget. Now, a series

of economists is coming out and saying that even in economic terms balancing

the budget involves more costs than benefits. Mark

Thoma cites Bradford

Plumer in The New Republic quoting Joe Stiglitz as saying

that it’s OK to raise deficits if you’re spending money on worthwhile causes

such as climate change. Thoma agrees:

The benefits from using tax dollars for things such as health care, infrastructure,

or other important objectives provides benefits that exceed the costs from

increasing taxes, including any reduction in output. Thus, when the economy

is in a state where there are highly beneficial government projects waiting

in the wings and taxes that can be increased without causing substantial costs,

i.e. if the benefits exceed the costs, then deficits should not be an obstacle

to putting those projects in place.


Mansori is almost convinced, although he does wonder whether there might

be a causal connection between high structural budget deficits, on the one hand,

and low investment spending by US businesses, on the other. Companies are returning

money to shareholders now because they don’t know what kind of tax rates might

apply in the future: after all, borrowing money is essentially the same thing

as raising future taxes.

Still, budget deficits are here to stay, it would seem. George W Bush is likely

to end up spending the best part of a trillion dollars on the Iraq war, all

told, without much if any visible negative effects on the economy. So spending,

per se, isn’t the problem.

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