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Friday, August 03, 2012

A Balancing Budget Amendment

A balanced budget amendment may have a good intent (making sure that expected revenues equals expected outlays); however, it does not assure that by the end of the fiscal year no deficit has been created. What we need is a balancing budget amendment, where an action is taken that actually balances the budget. Here is a suggestion.

At the end of the fiscal year the amount of the deficit for that year is calculated.  There are then two methods for paying off this deficit. The first way, calculate an apportioned wealth tax. For example, let's say we had $500 billion deficit, and the amount of wealth of all U.S. private property (real and financial) was  $50 trillion.   There would be a one-time 1% tax on wealth ($500 billion /  $50 trillion).   So, someone who owned a $5,000,000 home and had $10,000,000 in financial assets   would be assessed  $150,000 (= 1% of $15,000,000).

 A second way is that the money is printed to pay off the deficit. Thus,  if at the end of the year the government had $500 billion deficit, it would print the money and pay off what was owed.

Now, each method has its own side effects. The first could slow down consumption as people had less money to spend. The second could heat up inflation by expanding the money supply. Thus, it would be helpful to use a mix of these two, taking into account whether inflation or recession is the greater risk.

The reality is that assuring that we do not add to the debt, we must have a balanced budget (including interest payments, and emergencies) at the close of the year after we see what has been actually spent and received. While it is a good idea to write a budget  that is balanced to begin with, it is still necessary for us to be balancing it at the end of the year.

The exercise in the example above, allows us to get a better sense of how difficult are our problems with the deficit and the debt (the amount owed in total from all current and previous deficits).   To pay off our national debt (which is approaching $15 trillion),  would take us 30 years if we payed off the principal at $500 billion dollars a year, which as we see above would require something like a 1% a year wealth tax.