2. Explain why states required by their constitutions to balance their budgets are likely to experience more severe economic fluctuations than states not held to that requirement.
In recessions, real GDP falls. This implies that consumers’ incomes, consumer spending, and producers’ profits also fall. So in recessions, states’ tax revenue (which depends in large part on consumers’ incomes, consumer spending, and producers’ profits) falls. In order to balance the state budget, states have to cut spending or raise taxes. But that deepens the recession. Without a balanced-budget requirement, states could use expansionary fiscal policy during a recession to lessen the fall in real GDP.