Download Ideally, Fiscal Policy would be conducted by a squirrel.

A BALANCED BUDGET AMENDMENT
WWSD?: What would a squirrel do?
Ideally, FISCAL POLICY would be conducted by a squirrel.*
*Maybe not this squirrel. He appears to be an alcoholic.
Why a squirrel?

The squirrel knows how to dampen business cycles.
 He
collects more nuts than he consumes (runs a surplus)
in times of plenty (the summer).
 He consumes more nuts than he collects (runs a deficit) in
times of lean (the winter)
By running a surplus during an expansion, the squirrel
would help to moderate inflation. By running a deficit
during a recession, the squirrel would help to moderate
unemployment.
Seldom is a squirrel on the ballot.
Since we can’t vote for Tamiascurus hudsonicus,
we are left with Politici corruptas. The problem with
politicians (Right, Left, and Center) is that they have
incentive to spend as much as possible to satisfy the
demands of their constituents and contributors. This is
true regardless of the phase of the business cycle,
e.g., Medicare--Part D, the prescription drug benefit.
One way to rein in these spendthrift politicians would
be to force them to spend only as much as they
collected in revenue… this is called a Balanced Budget
Amendment.
Balanced Budget Amendment
Many states have balanced budget
amendments and there is growing call for
the federal government to adopt one as
well. It seems like a good idea, but is it?
Good idea?
NO!
This is a terrible idea.
Why so terrible?
Because a balanced budget amendment exacerbates
the business cycle. During a recession, real GDP
decreases  tax revenues decrease  government
expenditures decrease  real GDP decreases more.
Conversely, during an expansion  tax revenues
increase  government expenditures increase. The
balanced budget amendment is the anti-squirrel. Let’s
look at a balanced budget amendment in the AS-AD
model:
Price level
During an expansion,
AD increases and
real GDP increases.
LRAS
SRAS
During a
recession, AD
decreases and
real GDP
decreases
When real GDP increases,
tax revenues increase 
government expenditures increase.
AD4
AD3
When real GDP decreases,
tax revenues decrease 
government expenditures decrease.
AD2
AD1
Real GDP
Balanced Budget Exacerbates the Business Cycle