On the Case for a Balanced Budget Amendment to the U.S. Constitution

Marina, Azzimonti and Marco, Battaglini and Stephen, Coate (2010): On the Case for a Balanced Budget Amendment to the U.S. Constitution.

Abstract

This paper uses the political economy model of Battaglini and Coate (2008) to analyze the impact of a balanced budget rule that requires that legislators do not run deficits. It considers both a strict rule which cannot be circumvented and a rule that can be overridden by a super-majority of legislators. A strict rule leads to a gradual but substantial reduction in the level of public debt. In the short run, citizens will be worse off as public spending is reduced and taxes are raised to bring down debt. In the long run, the benefits of a lower debt burden must be weighed against the costs of greater volatility in taxes and less responsive public good provision. To quantify these effects, the model is calibrated to the U.S. economy using data from 1940-2005. While the long run net benefits are positive, they are outweighed by the short run costs of debt reduction. A rule with a super-majority override has no effect on citizen welfare or fiscal policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Balanced Budget Amendment, Political Economy, Markov Equilibrium, Bargaining
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C70 - General; D - Microeconomics > D6 - Welfare Economics > D60 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General

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