Cut, yes; Cap, Maybe; Balance, No

Again, the word endogeneity raises its ugly head. Tax revenues and government expenditures are endogenous. This means that the magnitudes of taxation and spending depend, in part, on the status of the economy. When we head into a recession, tax revenues decline and expenditures (for example, unemployment expentitures) rise. So let’s say that we create a budget that is in balance. But then we head into a recession. This would create a deficit after the fact. So would we be in violation of a balanced budget amendment? Please understand that I am not making some goofy Keynesian argument that we ought to lower tax rates and raise expenditures as we move into a recession. Instead, I am making a simple accounting point: the automatic “stabilizers” (a Keynesian term) kick in and automatically throw the budget into deficit.

What do you think would happen then? My prediction is that some Federal judge or group of judges would force us to raise tax rates.

I look much more favorably on a cap such as a percent of GDP that can be Federal expenditures. Here is the problem with this proposal. It will drive our representatives and senators to take more things off budget. Nevertheless, it might be worth a try.

I am very much in favor of simply cutting Federal government expenditures. Which ones will be the topic of another post.