Dear Senator Pryor, why not pass the Balanced Budget Amendment? (“Thirsty Thursday”, Open letter to Senator Pryor)

Dear Senator Pryor,

Why not pass the Balanced  Budget amendment? As you know that federal deficit is at all time high (1.6 trillion deficit with revenues of 2.2 trillion and spending at 3.8 trillion).

On my blog www.HaltingArkansasLiberalswithTruth.com I took you at your word and sent you over 100 emails with specific spending cut ideas. However, I did not see any of them in the recent debt deal that Congress adopted. Now I am trying another approach. Every week from now on I will send you an email explaining different reasons why we need the Balanced Budget Amendment. It will appear on my blog on “Thirsty Thursday” because the government is always thirsty for more money to spend.

Take a look at this article below.

Nov 6, 2012

The Case for a Balanced Budget Amendment

Lacy Hunt, executive director at Hoisington Investment Management, believes the debt problem in the United States and the other major economies is far worse than most realize, and he thinks an amendment to the constitution mandating a balanced Federal budget may be the only thing that can save us from a disastrous outcome.

“The ‘Keynesian Endgame’ that is increasingly part of the lexicon refers to a government becoming so excessively indebted that it loses access to credit,” he said at the Fixed-Income Management 2012 conference in San Francisco.

While historically low yields on US Treasury debt would seem to indicate that losing access to credit markets is not an imminent prospect for the United States, Hunt warned that debt accumulation trends in the United States are having increasingly negative economic effects that could take a long time to reverse.

Worse, interest rates won’t provide the early warning system many expect, a consequence of financially repressive Fed policies. By the time rates signal a problem, it may be too late to do anything about it, according to Hunt, who previously served as the chief economist for HSBC and a senior economist for the Federal Reserve Bank of Dallas.

Hunt traced the roots of the US debt problems to the election of 1960, when both major political parties favored greater government involvement in the economy, a policy advocated at the time by Yale economist James Tobin. But contrary to what many believe, deficit spending has not improved the economic outcome.

“Physical investment must equal savings and income over the long term,” Hunt said, citing two studies that suggest that debt accumulation beyond certain thresholds negatively impacts economic growth. In a 2011 study published in the Journal of Economic Surveys, Andreas Bergh of Lund University and Magnus Henrekson of the Research Institute of Industrial Economics found “an increase in government size by 10 percentage points is associated with a 0.5% to 1% lower annual growth rate.” This reinforced the findings of a study commissioned by the ECB, which concluded that the “negative growth rate effect of high debt may start from levels of around 70–80% of GDP.”

US aggregate public and private debt is now upwards of 350% of GDP (not including unfunded liabilities, which would bring debt-to-GDP to 750%), and Hunt noted that much of this is what he called “unproductive debt,” taken on to fuel consumption rather than generate lasting economic benefit.

“We’re in way over our head, and the mix is wrong,” he said, referring to the amount of US debt. According to Hunt, consumptive debt crowds out productive investment and weakens the overall economy over time, as the velocity of money falls despite increasing government spending. This is happening now.

“The business cycle is no longer really operating, and GDP growth is being misinterpreted. GDP measures spending, not prosperity,” Hunt said. “While GDP has gone up, real incomes have declined,” and the symptoms of economic dysfunction in the United States are becoming all too apparent:

The way out of this mess? The solution, according to Hunt, is a sustained increase in savings, sometimes referred to as “austerity.”

“The way you reverse over-indebtedness is by living within your means,” he said, suggesting that economist David Hume was correct when he wrote in 1752 that “the normal course of government activity should be to run a surplus.”

As Hunt sees it, the only way to achieve a balanced Federal budget is by enacting a Constitutional amendment, as advocated by economist Milton Friedman almost 30 years ago.

Japan, meanwhile, presents an example of what not to do, according to Hunt. “Japan has reduced the savings rate, trying to reduce indebtedness,” and over two decades has failed to generate sustainable economic growth, he said. The United States is “now on that path.”


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credit: ©iStockphoto.com/VanWyckExpress

____________

The Balanced Budget Amendment is the only thing I can think of that would force Washington to cut spending. We have only a handful of balanced budgets in the last 60 years, so obviously what we are doing is not working. We are passing along this debt to the next generation.

Thank you for this opportunity to share my ideas with you.

Sincerely,

Everette Hatcher, lowcostsqueegees@yahoo.com

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