22 A BALANCED BUDGET AMENDMENT copy

22 A BALANCED BUDGET AMENDMENT copy - economy. BBA limits...

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SECTION 22: SHOULD WE HAVE A BALANCED BUDGET AMENDMENT?
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AN ARGUMENT AGAINST A BALANCED BUDGET AMENDMENT DESTABILIZING Makes fluctuations in the business cycle even bigger
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EXPLANATION: Start with a balanced budget Assume a recession occurs Tax revenue decreases and Government expenditures increase for welfare, food stamps, unemployment, etc.
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Now G > T And a deficit occurs (in violation of BBA!)
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Suppose we MUST balance the budget Thus, we must increase taxes or decrease government spending. An increase in taxes makes the recession even worse. A decrease in government spending makes the recession even worse.
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CONCLUSION: During a recession, trying to achieve a balanced budget will make the recession worse.
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AN ARGUMENT FAVORING A BALANCED BUDGET AMENDMENT BBA forces the government to limit spending so that it cannot exceed tax revenue. BBA tends to lead to a smaller government presence in the
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Unformatted text preview: economy. BBA limits the growth of social programs Free medical care Free prescription drugs Welfare and food stamp programs Should current taxpayers pay for all current government spending? What if the current spending provides benefits for future generations? Should future generations pay some of the costs for the highways, bridges, post offices, schools, national defense, medical research, etc.? THE BURDEN OF THE DEBT WHO EVENTUALLY PAYS FOR GOVERNMENT PROJECTS? If tax revenue is used, then current tax payers pay If bonds are issued, then current lenders pay for the projects. Lenders must be repaid (with interest) in the future. Future taxes must be collected (or new loans made) to pay off the debt with interest. In this way, all future generations share part of the cost of the project...
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This note was uploaded on 04/15/2008 for the course ECON 0110 taught by Professor Kenkel during the Fall '08 term at Pittsburgh.

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22 A BALANCED BUDGET AMENDMENT copy - economy. BBA limits...

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