Tax Revenue During Recession - Assignment Example

Is the author correct in arguing that the requirement of an annually balanced budget would tend to destabilize the economy? Explain. Ans) Yes, the author is correct in arguing that the requirement of an annually balanced budget would tend to destabilize the economy because according to the new amendment tax revenue will be increased in time of recession to restore the economy. This aspect of the amendment would be likely to make default crises more frequent; when a budget that is balanced at the start of the year falls out of balance during the year due to slower-than-expected economic growth or other factors beyond policymakers’ control, default could threaten if cuts large enough to restore balance can’t be passed swiftly and it proves impossible to secure a three-fifths vote to raise the debt limit.

By the same token, the balanced budget amendment would not only undermine the automatic stabilizing function the federal government plays but would push in the opposite direction by requiring greater retrenchment when the economy falters. As a consequence, the constitutional amendment is likely to make recessions more frequent and deeper. The amendment also would increase the risk of a government default. It has often proved difficult to amass a simple majority in Congress to raise the debt limit so an impending default could be averted.

The constitutional amendment also undermines majority rule, the basis for our democracy. The amendment would essentially enable minorities to engage in a form of extortion; they could threaten to plunge the nation into serious fiscal difficulty by refusing to help provide a three-fifths vote to waive the balanced budget requirement and raise the debt limit when a recession loomed, unless they were granted concessions on major policy issues as the price for their votes. A recent CBO study found that if deficits are held to two per cent of the Gross Domestic Product through 2030, we will experience solid economic growth, and younger generations will be substantially better off than current generations.

In fact, CBO found little difference in growth rates between such a policy and a policy of balancing the budget every year.  f an annually balanced budget is required, would automatic stabilizers still exist? Ans) if an annually balanced budget is required, automatic stabilizers would not exist because in times of recession tax revenue will be increased which is opposite of Automatic Stabilizers. To support this phenomenon the writer says, “One of the key reasons we have had no depression and few severe recessions during the past 60 years is that what economists call the "automatic stabilizers" — reductions in tax collections and increases in unemployment insurance benefits and means-tested entitlement benefits — automatically kick in when the economy weakens and unemployment climbs”.