States will follow balanced budget constraints even if they’re formally repealed --- at most, states will overspend but subsequently ATTEMPT to balance a budget because of political pressures and creditors calling in their debts --- when they can’t pay up, cascade of state defaults ensures economic collapse

Politicians generally benefit both from cutting taxes and from increasing spending on popular programs. When politicians are not required to pay for current expenditures with current taxes, they face strong incentives to run up ever-greater deficits. n60 Absent some form of balanced budget constraint, nothing prevents lawmakers from using deficits to finance structural imbalances between taxes and spending, rather than limiting deficit use to [*762] coping with downturns. n61 Although accrued debt must eventually be paid off, politicians can leave this task to the future, when they will presumably no longer hold office. n62 It was precisely this problem that caused states to adopt balanced-budget requirements in the nineteenth century. n63 States accrued ever-increasing levels of debt in order to finance infrastructure projects without raising taxes. After the national economy tanked in the late 1830s, states found they had stretched themselves past their limits. n64 Throughout the 1840s, state after state defaulted on its debts. n65 State governments responded to these debt crises by enacting balanced-budget requirements into state law. n66 Whether as a direct result of these new formal balanced-budget requirements, or due to the debt crises fostering an informal norm of budget balancing, the states have largely refrained from deficit spending since the 1840s. Underscoring the importance of state balanced-budget constraints, the incentives for deficit spending might be even stronger today than in the nineteenth century. n67 The political landscape is currently divided between one party that seeks to shrink the size of government, and another party that seeks to increase (or at least maintain) the current level of government spending. Conservatives may be tempted to pass tax cuts during upturns, even when they realize the fiscal situation is unsustainable. Through this strategy, known as "starving the beast," a conservative government can make it harder for subsequent liberal governments to increase spending. n68 Moreover, by campaigning for tax cuts without specifying which spending programs will eventually need to be curtailed in order to pay for the tax cuts, conservatives can take advantage of voter myopia as to the connection between taxes and [*763] spending. n69 As liberals face the opposite incentives - to campaign for deficit-financed spending increases in order to prevent future conservative governments from reducing taxes - deficits would likely grow to dangerous levels in the absence of balanced-budget constraints. n70 In essence, each side can benefit from playing chicken. Instead of working together proactively on a sound fiscal policy, conservatives can push for tax cuts and liberals for spending increases, until all the slack in the budget has been used up. Each side hopes the other will give in first - before the state succumbs to bankruptcy - with conservatives hoping that liberals will eventually agree to cut spending, and liberals hoping that conservatives will eventually consent to tax hikes. n71 But if both sides delay compromise for too long, the end result may be tragedy. 2. How States Respond to Balanced-Budget Constraints It is often noted that the written balanced-budget requirements within many state constitutions lack effective enforcement mechanisms. n72 Even to the extent states are legally required to match expenditures with revenues, states can use a variety of "budgetary gimmicks" to create the appearance of balance without actually adjusting either taxes or spending. For instance, during the 2001-2003 downturn, states played accounting games, raided pension funds, sold state assets, securitized future revenue streams, and engaged in concealed borrowing. n73 Taken to the extreme, state governments could simply fake their accounting statements to avoid making painful adjustments during downturns. [*764] Despite this, states make only limited use of budgetary gimmicks. n74 During the recession of the early 1990s, for example, budgetary gimmicks were estimated to have accounted for only 19% of state responses to fiscal volatility; the remaining 81% was split between tax hikes and spending cuts. n75 Similarly, during the 2001-2003 downturn, these gimmicks were estimated to have accounted for only 24% of state responses to fiscal volatility. n76 Typically, states rely heavily on budgetary gimmicks and rainy-day funds during the first year of a downturn, but then turn to more painful coping measures during subsequent years, once these easy methods have been exhausted. n77 Why don't states make greater use of budgetary gimmicks, or simply ignore their balanced-budget requirements all together? The literature posits two distinct answers to this question. First, states may fear the disciplining power of capital markets. As Richard Briffault argues: The states lack the fiscal and monetary tools and the tax base of the federal government. States can neither print money nor close their borders to prevent residents and businesses from fleeing to other jurisdictions to avoid high levels of state taxation. In order to borrow, a state must demonstrate to potential lenders its capacity to repay its debts. If it persistently ran a significant deficit, its creditworthiness would be undermined. It would have to pay a substantial penalty in terms of higher interest rates or, ultimately, risk loss of access to capital markets. States are like households or businesses. They balance their budgets not necessarily because their constitutions require it - after all, households and businesses are not subject to constitutional requirements - but because the marketplace demands it. n78

Second, states may be constrained by norms against running deficits. According to a survey by the National Association of State Budget Officers: "The most important factor contributing to balanced budgets is not an enforcement mechanism or a provision specifying how a shortfall will be made up. Rather it is the tradition of balancing budgets, the mindset this tradition creates, and the importance placed on balanced budgets that result in states complying with their requirements." n79 [*765] Whether the cause is fear of capital markets, adherence to antideficit norms, or a combination of these two factors, the fact remains that "most states balance their budgets most of the time whether or not they are required by their constitutions to do so." n80 Although states use budgetary gimmicks as a partial response to fiscal volatility, states deal with the majority of volatility through a combination of tax and spending adjustments. Ultimately, what matters is not whether a state has a balanced budget requirement written into its constitution, but the extent to which a state's political community operates under a norm of budget balancing, and the extent to which financial markets punish departures from this norm.