There’s a sense in the air that the answer to our problems, be it economy, deficit or schools, is to cut, cut, cut. Cut salaries, cut benefits, cut programs. On the surface, the logic of cutting makes some kind of sense. There are deficits at the Federal and State level (no, Virginia’s budget is not in balance if you fail to make payments into the state retirement fund), and spending less is one of the common prescriptions for closing deficits.
The dirty truth, however, is that no long-term government deficit has ever been solved simply by cutting the budget. Budget cuts are net drags on an economy, and a shrinking economy exacerbates budget problems by yielding shrinking revenues for the government, which makes deficits worse, which creates incentives for more cuts, which further drag the economy… It’s a vicious, downward cycle that leads to malaise and bankruptcy.
The fact is that the only thing that has ever truly balanced a major government budget is economic growth. That’s it. All other supposed “answers” are simply second-order results of robust economic growth. So, if you are truly in favor of balanced budgets, you must be in favor of policies that encourage economic growth.
Ah, but there’s a catch. The type of growth matters. If you look at the history of balanced Federal budgets, they came near the middle and end of periods of economic growth in which the bottom 50% of households saw their incomes rise and fortunes improve.
Follow below the fold for a short, and by no means complete, historical survey of balanced budgets. Continue reading