What Are the Pros and Cons of a Balanced Budget?

Few issues are more contentious in contemporary American politics than the federal government's budget. Those who argue in favor of a balanced budget claim the growing federal debt will have harmful effects in the future. Others counter that a government budget isn't like a household budget and shouldn't be viewed as such. They say deficits should be readily used to ward off economic or foreign threats, and that the government debt isn't an urgent problem.

Ultimately, proponents of balanced budgets also support restricting the power and scope of the government, while their opponents want the government to have the power to affect wide-reaching change if needed.

Key Takeaways

  • Many mainstream economists don't believe that the U.S. government debt requires urgent attention in the form of a balanced budget.
  • A minority of economists are gaining attention with the argument that it doesn't matter whether a government that prints its own money balances its budget.

Economists Are Divided on Deficits and Debt

Economists are divided on the question of how important it is for the U.S. to tackle its budget deficit and total outstanding debt. The mainstream view is that the debt—now at $23 trillion—isn't a big cause for concern right now, so tackling the deficit—the difference between the government's revenue and spending each year—isn't urgent.

Others argue that the government's debt eventually will become a problem and it would be easier to tackle it now. Still other economists, currently in the minority, argue that government budget deficits don't matter—up to a point.

Arguments for Balancing the Budget

The long-running argument for urgently balancing the U.S. budget goes something like this: The ever-rising U.S. debt will eventually cause investors to question the government's ability to repay its debts, resulting in surging interest rates that will quash private-sector investment as well as the economy. If interest rates rise too quickly, the government would find it very difficult to afford interest payments on the national debt, leading to default or still higher inflation.

In addition, they say, running large deficits when an economy is at full employment can shift economic activity from the private sector to the public sector, tamping down growth in the long run.

No Need to Worry About Deficits for Now

The more mainstream view among economists is that the nation's debt may ultimately become a problem, but it's not one we need to face by balancing the budget right now. They cite current conditions, including historically low interest rates, which indicate that investors don't see the debt as much of a problem either. U.S. government bonds are still considered the safest investments on Earth, and decades of predictions of bond-market doom have yet to be realized.

One reason economists caution against taking drastic measures to balance the budget is the impact it would have on the economy. Balancing the budget would require steep spending cuts and tax increases—which would amount to a double body blow to the U.S. economy. This could actually increase the deficit by lowering tax revenue and causing the government to spend more on social programs.

These Economists Say Deficits Don't Matter—To a Point

One view of government deficits and debt that has risen to prominence in recent years is that of Modern Monetary Theory (MMT). Proponents of MMT, usually liberal economists and politicians, argue that deficits and debts generally don't matter because the government, unlike a household, can simply print more money. The catch: This theory only holds when inflation is weak or at least contained. Government borrowing becomes a problem only when it raises aggregate demand to inflationary levels, MMT proponents say.

Because a government is able to print money and raise taxes, its budget should not be compared to a household budget.

Arguments Against a Balanced Budget Law

Many conservatives have suggested passing a law or even a Constitutional amendment requiring the government to balance its budget. But most mainstream economists argue this would be a risky way to tackle the debt, one that could hamstring the government in times of economic crisis or other emergencies when additional spending is required.