11/17/2011 03:27 pm ET Updated Jan 17, 2012

The False "Family Analogy" Argument for a Balanced Budget Amendment

Families must balance their budget every year, proponents of a constitutional balanced budget amendment often argue, so why shouldn't the federal government?  This argument has several serious flaws, the most basic being that families often do not balance their budgets, for good reason.

A family that takes out a student loan to send a child to college, for example, might end up with a large "deficit" for that year -- that is, it will spend more than it earns that year.  But a college education is a solid long-term investment that is likely to translate into significantly higher earnings over the child's working career.

Similarly, a family that obtains a mortgage will almost certainly have a "deficit" for that year, but it will also have a house to live in.

Families also build up savings in good economic times and draw them down when times are tight to cover expenses that exceed their current incomes.

The proposed constitutional amendment would bar the federal government from such practices.  The federal government couldn't borrow to finance investments that boost future economic growth, such as infrastructure improvements.  And if it ran a surplus one year, it couldn't draw it down the next year to help balance the budget if the economy turned down.

In fact, even if a family financed a new house or a college education entirely out of savings - with no loans and no mortgage - that would still be prohibited "deficit financing" under the terms of the balanced budget amendment, because it is still a case of spending more in that year than the family earned in that year.

In short, a balanced budget amendment wouldn't align federal budgeting practices with those of families. It also would threaten serious economic harm, especially in recessions -- and would harm family budgets by causing many Americans to lose their jobs, as Macroeconomic Advisers has explained. It also would create a host of problems for Social Security and other basic federal functions, as we've explained.

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