The USA has more economic flexibility under our current system than it would after a budget-balancing amendment. All we have to do is reel in spending.

On July 29, 2011, calling the Republicans' push for a balanced budget amendment "political theater," House Democrats dismissed the Republican proposal. Democrats accused Republicans of exacerbating legislative gridlock by making changes to House Speaker John Boehner's bill. "I think in the last 24 hours, we've confirmed what many people suspected, which is that tea party Republicans may be a noisy and effective protest movement, but they're unfit to govern," said Rep. Chris Van Hollen (D-Md.)

Boehner's proposal ties a balanced-budget amendment to the two-step debt-ceiling bill. GOP conservatives held back their support for Boehner's proposal because they wanted the balanced budget amendment provision included. Boehner's bill will then head to a hostile Senate, where Majority Leader Harry Reid has said the package is dead on arrival.

So, with the statement by Reid and Boehner's bill, let's examine the pros and cons of a balanced budget amendment, and its affects on political and fiscal policy, and the economy.

Balanced Budget Amendment Definition

The balanced-budget amendment is a proposed amendment to the U.S. Constitution that would limit total government spending to be less than or equal to tax collections. It will require Congress to pass a balanced budget each year. It is said to be a way to limit the size of the Federal government. Equality between revenues and expenditures constitutes a budget. A budget is important for our government, where revenues are taxes, and expenditures are spent on the public and administrative expenses. The federal government is famous for failing to produce a balanced budget, except in periods of unexpected prosperity. Such an amendment would theoretically eliminate the federal deficit, and hopefully would prevent discretionary use of fiscal policy, which is blamed for political business cycles and the resulting problems of inflation and unemployment.

The House of Representatives passed a balanced budget amendment in 1995, but the Senate failed to do so by one vote. The issue has come up again. In March of 2010, a bipartisan congressional caucus was formed to explore and discuss the possibility of a balanced budget amendment. Rep. Mike Coffman (R-CO) and Rep. Jim Marshall (D-GA) launched a bipartisan congressional caucus dedicated to reviewing H.J. Res. 1, the Balanced Budget Amendment. The caucus is dedicated to educating members of Congress on the importance of the proposed amendment to the Constitution.

Balanced Budget Amendment Pros and Cons

Troy Senik, former White House speech writer for George W. Bush, recently published an article favoring a constitutional amendment requiring a balanced budget. "What's needed is a Constitutional Amendment requiring 60 percent of the Senate and House of Representatives to vote in the affirmative for any piece of legislation that increases the debt ceiling, raises current taxes or imposes new taxes. The Constitutional Amendment should also require Congress to pass a balanced federal budget annually."

Paul Krugman, believes, however, the demand for fiscal austerity is not necessary. Krugman wrote: "Under the kind of conditions we're now facing, the main determinant of business investment is the state of the economy, as evidenced by the plunge in investments. This, in turn, means that anything that improves the state of the economy, including fiscal stimulus, leads to more investment, and hence raises the economy's future potential. That is, under current conditions deficit spending doesn't lead to crowding out – it leads to crowding in. In fact, you could argue that the worst thing we can do for future generations is NOT to run sufficiently large deficits right now."

Senik says "any serious approach to our economic travails" must address three areas: (1) do not incur more debt, (2) do not increase taxes during a recession, and (3) address the need for a balanced budget. Saying that "every federal expenditure is extracted from the productive private economy," Senik continues "the fundamental problem is the size of government." Krugman argues that Senik's plan would exacerbate the United States' economic problems.

In the short run, citizens will be worse off as spending is reduced and taxes are raised to bring down debt. In the long run, the amendment will lower the debt burden, allowing it to be paid off.

Balanced Budget Amendment Consequences

Senators Marco Rubio, Rand Paul, and others are supporting a balanced budget amendment. Their efforts to control Federal spending are admirable, but …. there is a danger! The current debt problem is caused by too much spending, not too little taxation. By the time an amendment is ratified, we may have a Congress favoring raising taxes rather than reducing spending to meet a constitutional requirement for a balanced budget. We must be careful. We need a Constitutional amendment that directly addresses spending rather than one that simply requires a balanced budget. Proposals to end the growth in the federal debt often cite legal budget-balancing measures, such as an amendment to the US Constitution. People favoring such an amendment fail to account for the economic policy consequences of their proposals. A constitutional amendment to mandate a balanced budget re-directs focus from the cause of the deficit to the budget balance.

What would be the consequences of a balanced budget amendment? It would completely change today's monetary system. That complete change in our entire money system would have extremely profound consequences, more profound than most people seem to realize. When the private sector saves financial assets, it does so at the expense of demand for goods and services. In our current monetary system, government can spend into the economy, injecting money to compensate for the saving by the private sector. If a balanced budget amendment were to pass, the government would not be able to do this. The problem is that the president and Congress spend into the economy to its detriment, causing serious economic problems. The USA has more economic flexibility under our current system than it would after a budget-balancing amendment. All we have to do is reel in spending.