The debt ceiling debate has revived the idea of a Constitutional balanced budget amendment. Members of the Republican party in both the House and Senate say the legislation would help reduce the nation's debt problem.
So what is a balanced budget amendment? A balanced budget amendment is a Constitutional rule requiring that spending cannot exceed income. It requires a balance between the projected receipts and expenditures of the government.
While it may make sense on the surface (revenue must exceed costs), a balanced budget amendment does not guarantee the fiscal discipline it implies, says Daily Ticker guest Adam Lerrick, economics professor at Carnegie Mellon University.
"Every state in the United States except Vermont has a balanced budget amendment," says Lerrick. "And yet we've seen that has not stopped many states, including three of our largest states -- Illinois, New Jersey and California -- from basically going bankrupt."
Lerrick says states continue to face massive deficits and economic crises because they fail to recognize the largest costs -- capital expenditures (infrastructure projects) and pension liabilities -- as budget items, much the way a corporation can hide losses or assets off-balance sheet. The result: a balanced budget AND a deficit.
He says it doesn't mean the country will be mired in a flood of municipal defaults, as analyst Meredith Whitney has predicted. But, balanced budget amendment or not, politicians will only curb their spending when left no other option."There are tremendous incentives for all the legislators -- politicians -- to circumvent" the rules, says Lerrick.