What are the pros and cons of operating on a balanced-budget?

Few issues are more complicated, contentious and controversial in contemporary American politics than balancing the federal government's budget. Those who argue in favor of a balanced budget offer many claims about the deleterious impacts of huge federal debt. Others counter that balanced budgets would drastically limit the government's ability to ward off economic or foreign threats.

Ultimately, proponents of balanced budgets like that it restricts the power and scope of the government. Their opponents want the government to afford wide-reaching power.

Interestingly, the most frequently cited reason for balancing the budget – that it robs future generations to pay for present expenses – is mostly incorrect. The government eventually has to pay back Treasury bonds (T-bonds), so future bondholders will receive nominal payments that are at least as large as the money lent today.

Several other factors haven't been addressed, including inflation, crowding out and the general inefficiency of government spending. It's likely that the future economy will be smaller and less productive because of federal borrowing, but it isn't because today's beneficiaries are stealing from future generations; it's because government activity hurts economic growth.

One particularly poignant critique of large debt is that it makes the U.S. government too vulnerable to interest rate fluctuations. If interest rates rise too quickly (potentially to fight inflation), the government would find it very difficult to afford interest payments on the national debt, leading to default or still higher inflation.

Keynesian economic theory suggests that deficit spending can help an economy fight recessions. Most Keynesians also support (at least in theory) paying off the debt during boom years. However, they want the power to spend beyond tax receipts to boost aggregate demand and the gross domestic product (GDP).

Most arguments against balanced budgets come from the recipients of the largest spending programs, such as Social Security, welfare, Medicare and the military. Even if those groups support a balanced budget in theory, they are practically opposed to the steps likely required for its execution.