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39 IRET Congressional Advisory 1 (1995)

handle is hein.taxfoundation/iretcgadv0037 and id is 1 raw text is: IRET February 27, 1995 No. 39 KEYNES IS ALIVE, BUT NOT WELL, IN WASHINGTON Opponents of a Balanced Budget Amendment assert that recessions will be deeper and more prolonged if the amendment prohibits the federal The argument is wrong analytically. It is also rejected by history. It should be rejected by the Senate as the basis for deciding the fate of the Balanced Budget Amendment. It is certainly true that the government's revenues automatically decline and certain of its outlays automatically increase during a recession. These automatic fiscal changes, however, don't - can't - increase total real spending. The resulting gap between government spending and government revenues has to be financed, either by the government's borrowing the difference or by resorting to the monetary printing press. If the government borrows the money to finance the deficit, the lenders' disposable incomes - the amount of their current after-tax incomes available to purchase consumption products or business assets government from running According to this Keynesian article of faith, increases in federal spending relative to federal tax revenues expand total government, household, and business - spending and thereby produce increases in total production, employment, and income. Much of this increase in government spending and decrease in government tax revenues occurs automatically moves into recession. With budget deficits. is reduced Budget deficits will not maintain, let alone inerease, ieal disosable income unless they result from fiscal actions that incease incentives for people to work, save, invest, innovate, stait new businesses or- expaind existing enterprises. as the economy falling output, employment, and income, payroll and income taxes decrease, while government outlays for such things as unemployment compensation and food stamps go up. These so-called automatic stabilizers allegedly cushion the decline in households' and businesses' disposable incomes, allowing them to maintain higher spending levels than they otherwise would be able to undertake. Moreover, according to this argument, the federal government should take action to increase other spending and/or to reduce taxes to fortify the automatic bolstering of disposable income. by the amount they lend the government the same amount as the increase in the disposable incomes of other people. No net increase in income available for spending occurs. The same thing is true if the government takes discretionary actions to increase its spending and/or to cut taxes. The government's borrowing to make up the difference between its additional outlays and reduced revenues cancels any increase in disposable income that allegedly would be produced by running a deficit. Of course, the government might resort to the money printing press to finance the deficit. This might lead to an increase in nominal aggregate demand but only at the cost of pushing up the price level. Real disposable income and spending would increase only if people were fooled and failed to spot the inflationary erosion of their actual incomes and purchasing power. Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to inorming the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

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