Sunday, January 30, 2011

Senator Hatch, balanced budget amendment is misguided

Published in Standard-Examiner, January 30, 2011, Ogden, Utah

 Sens. Orrin Hatch, R-Utah, and John Cornyn, R-Texas, are attempting to push once again the balanced budget amendment; Senator Hatch thinks that this time most people are frightened by the deficit and the debt.

He did not succeed previously, but this time most in Congress will join their hands in harmony to tackle this supposed threat to national economic security. However, the senators do not realize that their amendment will increase economic and political insecurity. It seems that Sens. Hatch and Cornyn are not familiar with the way fiscal policy works and the real affects of public debt.

In his column in this paper on Jan. 27, "Balance the budget," Senator Hatch states that Washington spending is leading the nation into bankruptcy. However CBO's estimates on President Obama's budget show that the actual deficit was 9.9 percent of the GDP in 2009. It is projected to be 10.3 percent in 2010, and is expected to decrease continuously through 2020, when it would be only 5.6 percent of the GDP. This data does not show that we are on the path to bankruptcy.

Senator Hatch claims that Congress cannot be trusted to remain on the path of fiscal balance. However, he forgets that budget deficits have been with us since the 18th century. They have been generally on an increasing path since 1932. The deficit during 2002-2009 (including recession years) has been increasing at the average rate of 36 percent per year. Most of this period consists of President George W. Bush's years, when Senator Hatch voted for the discretionary war on Iraq and the Bush tax cut. He could have made a serious attempt to balance the budget and propose a war tax to pay for the war during this time period when the average economic growth was 5.9 percent per year.

After WW II, the federal debt (excluding debt held in federal government accounts) reached its lowest points at 23 percent of the GDP in 1974 from the high of 108.6 percent of GDP in 1946. After a slight increase in late '70s, there has been generally an upward movement in public debt as a percentage of GDP since 1982, irrespective of the political party in power. Senator Hatch is frightened by the increase in debt, not realizing that the economy has gone through a very severe recession, one not seen since the Great Depression. The CBO's debt forecast of 90 percent of GDP by 2020 should be viewed in proper perspective. Like us, most developed nations faced severe recessions during 2007-2009.

Therefore, for example, Euro area debt was 92 percent of GDP in 2010 and is not expected to be less in 2011; our debt will be 63 percent in 2011. We are fortunate that our economy is bouncing back with positive growth, partly because of the fiscal stimulus and assistance to the financial market, and it shows in the CBO's deficit forecast.

Senator Hatch exaggerates the burden on future generations. Most of the public debt is held domestically, and therefore to that extent domestic bondholders are asset rich. There is a transfer of income from non-holders of government bonds to holders. It does not affect the income of the country. Even if our children and grandchildren inherit debt, they will be asset rich. To the extent foreigners own our debt, there is a leakage of interest income from the U.S. But if foreigners get rich they will spend it somewhere, including imports from the U.S. To take advantage of high-income foreigners' demand, we have to become more competitive in the world market. It also requires that we save more and consume less, so that we have enough supply to meet foreigners' demand for our products. There is no convincing evidence that public debt reduces national saving or reduces our competiveness.

The real problem arises when the increase in public debt is beyond our capacity to service it and deprives us in meeting our other public demands for security and other services. Estimates show that interest payments in 2010 would be 2.9 percent of GDP, which would decline with increasing growth rate. Also, in the current environment of low interest rates, we have not seen any crowding out of private investment.

The effort on the part of private and public sectors should be to direct spending which helps develop new technologies, infrastructure, human capital and futuristic products so that we could compete in the world market.  Future generations will thank us for the real assets they will inherit, and at the same time we would generate robust growth and revenues in the current period. We need a sensible and stable tax structure and spending priorities, which encourage productive entrepreneurship.

Politicians should not think of the federal budget like state and local budgets. The federal budget is one of the most effective tools of fiscal policy. The amendment would deprive the federal government the use of that tool to manage the economy. Unless Congress can outlaw business cycles, the balanced budget amendment should be permanently buried.

Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He offers original blog posts for the Standard-Examiner at He resides in Ogden.

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