This paper examines whether a balanced federal budget is a sound economic policy. Drawing on classical Keynesian theory, it argues that deficit spending can be a necessary and constructive tool during recessions, helping to stimulate economic activity, reduce unemployment, and fund critical public services. The paper also addresses the difficulty of reducing spending once programs are established, the argument that deficit spending on infrastructure and education constitutes productive public investment, and the risks posed by a balanced budget amendment, which would limit policymakers' ability to respond to economic downturns. Both the gains and losses associated with maintaining a balanced federal budget are considered throughout.
Why is a federal budget deficit so bad? The budget deficit is so politically contentious that few seem willing to ask this simple question. Because of the anti-deficit hysteria, even some ordinary citizens will protest: "I cannot spend at a deficit — why should the federal government?" However, this is a false analogy. There are often good reasons — for individuals as well as governments — to go into temporary debt.
Classical Keynesian economic theory states that the federal government must spend at a deficit level to stimulate the economy during a recession. This channels money into the pockets of consumers, and the resulting rise in consumption produces more tax revenue and lower unemployment. The risk of an economy spiraling into a depression means that government stimulus spending is often required as a necessary safeguard.
"Macroeconomists have known for decades that the economy can be brought out of periods of ill health by having the government spend money when everyone else is pulling back on their own spending… of course… everyone would have been much happier if the economy had continued to expand, which would have made stimulative deficit spending unnecessary" — but given the ebbs and flows of the business cycle, recessions are inevitable and the government must seek to cushion citizens against them (Buchanan, 2009). The question, therefore, is not whether budget deficits are "bad" or "good," but how they are being used. If they are being used constructively — to help the economy recover from a recession — then they should not be viewed with disdain.
Trying to balance the budget during a recession is disastrous. People have greater need for economic assistance to support themselves, and withholding aid in the form of food, healthcare, education for children, and other critical necessities may save money in the short run but will ultimately hurt the long-term future of the country. Deficit spending during downturns is not a sign of fiscal irresponsibility; it is a measured response to economic hardship that protects vulnerable populations and preserves the nation's human capital.
"Spending on infrastructure and education can justify ongoing deficits"
"Constitutional balanced budget rule would restrict countercyclical policy"
A mandated balanced federal budget, particularly one enshrined in law or constitutional amendment, would strip policymakers of the flexibility needed to respond effectively to economic downturns. The evidence drawn from Keynesian economic theory and practical fiscal experience suggests that deficit spending, when directed toward genuine stimulus and public investment, serves the long-term interests of the country far better than a rigid requirement to balance the books at all times.
You’re 55% through this paper. Sign up to read the remaining 2 sections.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.