Balanced Budget Amendment Slated to be Rejected by Tomorrow

So Tomorrow’s the big day. The U.S. government is slated to hit the debt ceiling, and with it will be faced with the prospect of actually having a balanced budget. I think the situation is nicely summed up in the opening sentence to an article from Cato: “America faces two very serious budget problems: Democrats, and Republicans.” Of course behind those problems are voters who vote for their congressman to steal and object to others’ doing the same.

This root problem is interesting and I’d like to take a minute to speculate about it. It looks like long term economic growth in the U.S. will slow down. The pace of government expansion can only continue so long before growth slows to a crawl and we hit some equilibrium. What happens then? I think there will be two changes in patterns of entrepreneurship.

The first change is a general decline in growth-oriented entrepreneurship. As the returns to private investment fall, young innovative entrepreneurs will focus on improving their (non-taxable) lifestyle rather than getting rich. Better to run a cool boutique shop and spend lots of time loafing around than work your ass off to pay taxes. Even more likely, students trained in navigating public schools and subsidized colleges will find themselves more at home in bureaucracy than industry. C students will get productive jobs and A students will shuffle papers.

The second change is an exodus of entrepreneurs. The U.S. isn’t the only game in town. The ambitious few who decide they want to make it big (and whose entrepreneurial spirit hasn’t been ground down by life in a culture that isn’t any longer interested in such ambition) will go elsewhere. And places like the Cayman Islands will get freer and flourish as they attract these entrepreneurs.

The U.S. as a country will gradually fade from prominence, the world will be less free overall, but some places will do well and will perhaps foster long run shifts.

4 thoughts on “Balanced Budget Amendment Slated to be Rejected by Tomorrow

  1. Interesting definition of ‘balanced budget’: not paying for bills already incurred.

    • There are two basic options: 1) Continue to pay interest on the debt but quit running deficits since they can’t take on any more debt. 2) Either default or repudiate the debt (not pay bills already incurred) which would be followed by a pretty serious lack of lenders willing to buy U.S. bonds. Since either option prevents the government from continuing with deficit spending, both are effectively balanced budget amendments (though the second one shifts the burden of debt from future tax payers who may not have agreed to the spending to bond holders who voluntarily financed the government).

    • To my mind, only option 1 counts as balancing the budget. But then we’d have to overcome the two serious budget problems you identified.

    • Option 2 is less balanced in the short run but leads to stricter constraints in the long run. (Being part of the generation obliged to pay the debt I’m partial to option 2.)

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