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August 3, 2011

Economist Warns of "Balanced Budget" Amendment

By Sherwood Ross

The U.S. needs a "pay as you go" approach to fiscal management, a noted economist says, warning of the "balanced budget" approach.


Raising the debt ceiling without an increase in taxes or elimination of loopholes was the right thing for Congress to do because if Congress failed to end the debt crisis the result would be economic stagnation, a noted economist says.
"While GDP may be rising (albeit at a snail's pace), unemployment remains unacceptably high," says Professor Dave Fagerstrom of the American College of History and Legal Studies, Salem, N.H. "Raising taxes will only lead to higher consumer prices, less consumption (70% of Gross Domestic Product), and continued anemic job growth and possibly further layoffs." Fagerstrom said. "The debt crisis is a large part of the reason why the economy last month only created less than 20,000 new jobs."
In a letter to Senator Kelly Ayotte of New Hampshire, Fagerstrom also urged Ayotte to oppose any "balanced budget amendment." "There are times like the current Great Recession and the Great Depression that preceded it, when government spending must exceed receipts. It is only when 'the good times roll' that Keynes and those of us who support that school of (economic) thought, support cutting spending and raising taxes to create a surplus and pay down debt."
Fagerstrom warned, "If this country adopted and ratified a balanced budget amendment, it would handcuff Congress from exercising its constitutionally granted ability to adjust fiscal policy (spending and taxation) to the economic times. That would leave the federal government with only monetary policy to overcome cyclical downturns."
"Since the Federal Reserve is autonomous," he explained, "a 'balanced budget amendment' ensures that both the executive and legislative branches forfeit any ability they presently have to smooth the 'guaranteed to happen' bumps in the road as the economy moves forward."
Delays in taking action to resolve the debt crisis, the economist asserted, caused "postponement of new job creation (due to uncertainty) plus reductions in consumption and investment as well as increased conservatism in lending."  Fagerstrom said that a lender who lends at today's low rates would incur significant losses should interest rates rise as a result of doubt about the country's ability to raise the debt ceiling "much less the catastrophe that awaits should we actually default."
"After we get through the debt ceiling crisis," Fagerstrom wrote, "Congress should debate the merits of a 'balanced budget amendment' versus a 'Pay As You Go' amendment with an "economic emergency" provision that ensures America will not be forced into another Great Recession, or worse, a Great Depression, because Congress itself has limited its abililty to do the right and necessary things in times of need."   #
(Sherwood Ross is a media consultant to the American College of History and Legal Studies at Salem, N.H.)

Submitters Bio:

Sherwood Ross worked as a reporter for the Chicago Daily News and contributed a regular "Workplace" column for Reuters. He has contributed to national magazines and hosted a talk show on WOL, Washington, D.C. In the Sixties he was active as public relations director for a major civil rights organization.