Tuesday, September 23, 2008

Balanced Budget = Mistake?

I have been confused about government finances for a while (thinking especially about stadium financing). Most state and local governments have a balanced budget obligation which, I assume, means that inflows (tax revenues and fees) must balance outflows (expenditures and transfer payments). Which sounds fine and reasonable.

Stadium financing proponents often argue in favor of government subsidy by noting increases in local business revenues (which I suspect are simply made up numbers). But I have also wondered whether there should be public support even if the numbers are valid. And thought: "No. Even if the numbers are right, the tax revenues related to that increase in business will be much smaller than the expenditure, even assuming some sort of multiplier effect based on local velocity of money." But I think my reasoning was incorrect. If one thinks of government not as a separate person but rather as a collective spending pool, then an increase in revenues less than the expenditures is an appropriate use of government funds (a collective action/public good theory; ignoring Mills type issues).

Which brings me to balanced budgets. I don't think there is much alternative to balanced budgets as local governments cannot print money. But I do wonder if this limitation results in suboptimal government spending (because the wrong measures are being compared and balanced). And then the kicker - perhaps federal subsidy mitigates this problem AND federalism (at least on the budget side) is a mistake. Yikes.

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