The Perils of a Balanced Budget

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Families have to balance budgets, so shouldn’t governments have to do the same? Not according to Rana Foroohar’s column in the latest issue of TIME. There’s a folksy appeal to the idea of a balanced budget amendment being pushed by Congressional Republicans. Since individual households aren’t supposed to spend more than what they make, why should the U.S. government be any different?

The reason isn’t folksy, but it’s also not hard to grasp. Unlike households, which better their lot in life by saving, governments have to spend to grow, especially in an economy like ours that depends largely on consumption. That rule, put forward decades ago by British economist John Maynard Keynes, is especially apt in the wake of economic disasters. If the government hadn’t borrowed to spend following the financial crisis, for instance, most economists think the economy would be worse off. In that scenario, a balanced budget amendment that restricted spending would have been downright disastrous, resulting in 5 million more lost jobs and a drop in economic output of 4.2%, according to the Economist Policy Institute. “The only way to truly get the U.S. economy back on track is to end this myopic focus on what to cut and start focusing on what to grow,” says Foroohar.

Read more here.

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