Question

The call for a constitutional amendment to force the federal government to balance its budget has been a long-standing issue in politics and economics.

a) Explain the arguments put forth by those who want a constitutional amendment (pro side).

b) Now explain the arguments (in words and a graph) of those who are opposed to a balanced budget amendment.

Answer 1

A balanced budget amendment is an amendment to the US constitution that would ban US govt from spending more money than it brings.

(a)The argument in favor of the balanced budget amendment :

The supporters of the balanced budget amendment argue that the growing levels of federal debt as evidence the Congress is unable to keep the deficit in check and it can't be trusted.

As Congress' power to tax and spend money comes directly from the U.S. Constitution, the demand for an amendment that would tie the hands of future Congresses would require a constitutional process.

• Too much federal debt would ultimately be unsustainable.

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

According to the supporters of the amendment, The current uprising of federal debt would inevitably lead to a financial crisis.

They suggest that 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.

(b) The argument against the balanced budget amendment :

The following graph shows the change in federal debt as a percentage of GDP. When the growth rate is above zero, the federal debt burden relative to the size of our economy grows, and when it's below zero, that burden shrinks.

No evidence of a debt spiral is on the horizon
Countries like the U.S. that issue debt in their own currency has a lot of leeway with creditors.

Considering 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.

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