Question

Do you favor legislation requiring the government to balance its budget? Why? What is the economic implication of your position?

Answer 1

A Balanced budget has several advantages and disadvantages. first, let us go through them one by one.

ADVANTAGES OF BALANCED BUDGET

Over the past several decades, the federal government has tended to run a budget deficit. In fact, it hasn't run a surplus since the Clinton administration:Over time, budget deficits produce growing levels of federal debt

1.Too much federal debt would ultimately be unsustainable, hence we require a balanced budget

Over time, high debt levels could result in higher interest payments, higher taxes, and/or lower spending on government services.

2.Take a theoretical debt spiral off the table:

The current trajectory of federal debt will inevitably lead to a financial crisis. At some point in the future, they suggest, investors in Treasury Bonds will lose faith that they'll be paid back and will demand higher interest rates as compensation for higher perceived risk. Higher interest payments would increase budget deficits, producing more debt, thus setting in motion a vicious circle.

DISADVANTAGES OF BALANCED BUDGET
Intuitively, a balanced budget appears to make sense, but it would suffer from several drawbacks.

1.No evidence a debt spiral is on the horizon

Countries like the U.S. that issue debt in their own currency have a lot of leeway with creditors. Consider how the UK, U.S., and Japan stack up next to China. Despite larger debt levels, interest rates are much lower for the three, which issue debt in their own currencies.

That suggests that the federal debt burden isn't anywhere near large enough to trigger a financial crisis.

2.Too much of a good thing
Balanced budgets might be overkill. That's because surpluses aren't necessary to put debt on a sustainable trajectory. What matters is not the total level of debt, but the level of debt as a percentage of the total economy. So all that's needed to keep that figure from rising is for debt to grow less slowly than GDP.

From fiscal 2005 through the first quarter of 2016, Amazon.com's long-term debt climbed more than 450% from $1.4 billion to $8.2 billion. But its earnings-to-interest coverage ratio improved from 5.1 to 6.6 because the company grew faster than its total debt.

Likewise, when the economy grows faster than Federal debt, the debt-to-GDP rate declines even if total debt increases.

3. Exacerbating recessions
A stringent balanced budget amendment could endanger the economy during difficult economic times.

A recession occurs when economic activity contracts. Weak sales cause weak profits cause layoff cause unemployment cause weak sales. A vicious cycle sometimes emerges that more government spending, through safety nets and other means, can alleviate.

A balanced budget amendment could allow the government to increase spending and lower taxes when times are good and force cutbacks during recessions -- precisely when doing so would weaken economic activity and worsen the recession.

4. Potentially worsening our debt burden
Deficits tend decrease or increase as a result of economic activity. A strong economy produces more taxes and lessens the need for safety net spending; a weak economy produces fewer taxes and increases the need for safety net spending

A federal balanced budget that deepened recessions could damage long-term economic growth to such a degree that it ironically creates more debt.

THUS, what I feel is that the disadvantages have a high weight in case of balanced budget and seems more economically sound as well. even if the gov take debt but if it uses it for productive activity rather than for consumption purpose than to that extent an unbalanced budget is more appealing .