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Why Even Keynesians Should Support the Compact: Excerpts from Dr. Sven Larson's Testimony in Support of the Compact for a Balanced Budget
September 15, 2014
My name is Sven Larson. I am an economist and a senior fellow with the Wyoming Liberty Group, a think tank in Cheyenne, Wyoming. I am also a member of the Compact for America Advisory Council. I received my BA in economics and philosophy from the University of Stockholm, Sweden and my PhD in Economics from Roskilde University in Denmark. My research is primarily focused on the role of government in the economy and on the effects of fiscal policy and deficits on government services. My most recent research contribution is a book wherein I present tangible reform ideas for key entitlement systems, including Social Security, welfare and health care, while taking into account the factors that contributed to the European crisis and their implications for the United States.
I accepted the invitation to join the Advisory Council for the Compact for America because of the urgency of our nation’s debt crisis and because the amendment proposed by the Compact for a Balanced Budget provides the best path to a balanced budget of all proposals that I have studied.
Not too long ago our debt grew larger than our GDP. At that point, global investors started paying more attention to us. We saw this happen in several European countries: investors are worried, and worry-driven attention means investor bias. They start looking for reasons why we may default on our debt. As a consequence, the cost of our debt starts going up. We are already at a point where we pay higher interest rates on ten-year Treasury Bonds than some European countries.
As the Federal Reserve tapers off its quantitative easing, and interest rates continue to rise with our growing debt, Congress will have to divert more and more tax revenues to paying interest on our debt. This will rapidly lead to challenging priority conflicts. It is not far-fetched that Congress, in a situation of fiscal panic, starts making drastic cuts to federal aid to states. This would perhaps temporarily ease the debt crisis at the federal level, but it would do so by transferring the crisis to the states. State legislators would be left with gaping holes in programs such as Medicaid, public education, welfare and transportation, and an obligation to find a way to fill them with new in-state revenue.
There are not many ways to prevent this fiscal-panic scenario from unfolding, but the balanced-budget amendment proposed by Compact for a Balanced Budget is a good example of how it can be done. It is, in fact, to the best of my scholarly judgment, the best balanced-budget amendment ever proposed - not because it immediately brings about a balanced budget - but because of its dynamic properties. Its strength lies in that it creates a pathway to that balanced budget, a pathway that is predictable, inevitable and transparent. The pathway allows us to close the federal budget gap without the risk of fiscal panic. It will not only change for the better how Congress manages taxpayers’ money, but it will also send a strong signal to global investors that the United States is now serious about solving its debt problems.