Aelle: Excellent question. You are right about state balanced budgets, but there are several differences between their schemes and the proposed BBA.

The biggest one is that states need to balance only their current budgets, that is, for ongoing expenses like salaries, pensions, gas for state troopers and the like. They do not have to balance their capital budgets, that is, building schools, roads, and so on. A federal BBA would be more acceptable if it insisted on balancing the federal current budget only, but all versions proposed so far cover both current and capital

Second, the states (or most of them anyhow) have “rainy day funds” that they put aside to spend in a recession. In effect, they run a surplus (and put it in the RDF) during good times and a deficit even on the current deficit (drawing out of the RDF) during bad times. Again, a federal BBA that included a rainy day fund would be, in effect, as I recommended, a requirement to balance the budget over the business cycle, not annually. In fact, if you have a BBA that covers current spending only and includes a RDF, basically, you have Sweden or Chile.

Third — a more technical difference, but important — states have their own fiscal policies, but not their own monetary policies. The federal government inherently has greater flexibility since it can (or should) use monetary and fiscal policy in a coordinated way. States are under tighter constraints because they don’t have that luxury.

Economist, Senior Fellow at Niskanen Center, Yale Ph.D. Interests include environment, health care policy, social safety net, economic freedom.

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