The California Budget and the Folly of "Balanced Budget" Politics

Prof.H at Fluxlife

In the recent history since the Reagan Presidency, the idea of a balanced government budget has become a mantra to some. Indeed, increasing debt burdens coupled with unfavorable interest rates can, eventually, become a drag on the economy if the growth of the debt rapidly outruns the growth of the economy. However, to regard the concept of a balanced budget as an imperative is inane and far more harmful to the economy than the debt that it seeks to avoid.

Government spending is a significant portion of the overall spending in the economy, and it is essential to a healthy economy and society. If there is any one lesson that we must learn from our current economic crisis, it is that it is spending in the economy that is the primary factor that drives and sustains the economy. Consumer spending is the most important engine for the economy, but government spending is the next most important. If government spending contracts even as consumer spending contracts, the entire economy falls and even collapses.

Balanced Budget Politics must be replaced by Stable Budget Politics if there is to be any hope of tempering future economic volatility. It must occur at both State and Federal levels.

Stable Budget Politics works something like this: A SURPLUS (revenue) budget must be required during times of economic boom, where the economy grows substantially in a given year; a BALANCED budget must be required during times of moderate growth; and, a DEFICIT budget must be maintained during times of near-zero economic growth or economic contraction. Overall, the goal must remain that during economic contractions, government spending either remains stable or actually increases.

There are a great many and substantial details involved in implementing and executing Stable Budget principles, and this is a mere conceptual overview. It is, however, a concept that needs a whole lot more attention.

One of California's problems appears to be that it engaged in large-scale deficit spending even during times of tremendous economic boom, leaving it still carrying large debts when it should have been bankrolling its savings accounts. Consequently, when the economy went sour, California's economic position was gravely disadvantaged. Coupled with the credit crunch, California found itself unable to increase its borrowing, and it's ability to maintain even basic governmental functions has become jeopardized.

Unlike most states, California's state economy is of a scale on par with the largest national economies in the world. Small and rural states, entering the recession equally disadvantaged, would be in even worse shape, but state spending remains important in those states. Consequently, what the Federal government needs to do is provide direct lending to states employing Stable Budget principles at a low 1% or less interest rate during any period where deficit spending is dictated by those principles.

Stable Budget spending principles can be implemented immediately, and they can help the current economy recover. However, their greatest value to society is that they will substantially reduce future economic instability and help prevent and minimize future economic recessions. Had they been instituted two decades ago, California's current budget crisis would not exist, and the last threads of the state's entire economy would not be hanging in the balance.

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awakeningmoon said...

i feel so clever after reading this post, who knew i could understand economics:)

calicolyst said...

It seems like you're proposing that the government reduce spending when it's not making enough money. If you explained this concept to a lawmaker, his head would explode. It'd just explode.

Ms. Florida Transplant said...

This is a very interesting idea I've never heard proposed before.

Suyambuvel. M said...

I'm not an American...But I wish that U.S should get out from this crisis cos even countries like India are directly dependent on the economy of U.S...We are facing the recession too...hope Barack Obama brings a change!!

Prof.H said...

Thank you for your comments everyone.

For democratic principles to be sound, the average individuals in a democratic society need to understand the fundamentals of the topics that affect them. Higher education does a good job of teaching Ph.D.'s how to talk tech-speak and analyze every last bit of esoterica on a subject, but generally falls short on teaching Ph.D.'s how to boil it back down to plain English. Indeed, it is all too easy to get oneself lost in those esoteric details and lose sight of the fundamentals altogether, as with the economists who advised Reagan and guided the creation of trickle-down Reaganomics. I am thrilled, awakenignmoon, if I helped you find your own cleverness.

Actually, calicolyst, Stable Budget policies regulate spending relative to growth in the economy rather than revenue figures, and don't contract with economic contractions. If, however, you are speaking strictly in terms of the big picture, where such standards are measured only on the scale of decades, scores of years, or half centuries, or longer, then yes, that is exactly what Stable Budget policies do.

As with the Watershed analogy to the economy discussed in a previous post, the Stable Budget concept has been in existence since at least the Reagan era, often raised as a counter-argument to arguments for Balanced Budget politics. It's a matter of whose concepts are in current favor with ...

And yes, indeed, the U.S. economic crash is dragging most of the rest of the world down too. It is a testament to the importance of U.S. consumers to the entire world economy.