Cut, Cap and Balance will destroy automatic stabilizers
Every recession will ultimately run its course. The question is not so much will we ever get out of this, but rather, how deep will it go and how long will it last? (Technically the GDP recession is over, but the job recession is still with us.) The key to a shallow and short recession is the automatic stabilizers.
To appreciate the role of the automatic stabilizers, we must first revisit the dynamic underpinnings of our economy. It is not just the amount of money in the economy, but who has the money and how often that money “turns over” in the form of demand for goods and services.
Our economy has always been subject to the business cycle. Irrational exuberance in our attempts to “keep up with the Jones” can lead to excess demand where too much money is chasing too few goods. Too much consumption based on too little income leads to an overheated economy.
Everyone wants new cars, a bigger house and all the latest styles in clothing and gizmos. Too much money chasing too few goods results in inflation and ultimately the dreaded wage-price spiral. At some point the economy runs out of steam, because people’s budgets get too overextended, and they have all the latest and greatest consumer products currently available anyway.
At that point the economy collapses. It used to be called a “panic” where a sudden drop in demand caused businesses to close, people to lose their jobs and long lines to form at banks as everyone tried to withdraw their money all at once.
The old style panics finally led to the ultimate panic in the form of the Great Depression. With unemployment rates of 25% or more and long bread lines, we learned about the importance of automatic stabilizers that prevent a Great Recession from turning into a Great Depression.
Most of our states have balanced budget laws. Some of our states have big savings accounts called “rainy-day” funds. When a recession strikes a state with a rainy-day fund, that state can use that fund to continue paying fire fighters, police officers, school teachers, and other essential workers during periods of revenue shortfall, without raising taxes or borrowing money.
Automatic stabilizers automatically increase or maintain payments during recessions and do the opposite during expansions. They include unemployment insurance payments, food stamps, Medicaid, Medicare and social security payments and many other programs that maintain some minimum demand for goods and services during economic panics or “recessions” as they are now called.
We may not yet be able to avoid recessions, especially when the housing market collapses, but we can make sure that we don’t make things worse than they need to be by destroying our automatic stabilizers.
Cut, Cap and Balance could work if it was eased in over the course of several years and a national, rainy-day fund was created to take up the slack in times of recession. Without a rainy-day fund, Cut, Cap and Balance will destroy our automatic stabilizers. Automatically running a deficit during recessions, as tax revenues dry up, is a substitute for a rainy-day fund by providing the money to pay for our automatic stabilizers.
To actually work, the rainy-day fund will need to be in the form of a constitutional amendment, including well-defined rules for funding it and using it. Otherwise, Democrats will tap it for their special spending programs and Republicans will destroy it to give people back their money in the form of tax breaks (“After all, it’s the people’s money.”).
If our country, our states and our citizens all establish rainy-day funds, our economy will perform much more smoothly, and we will all be better off in the long run. Now is the time for our federal government to lead the way and set a good example for everyone.