Most institutional investors and corporate financial executives reluctantly support Congress' efforts to pass a balanced budget amendment as a last resort to stop the nation's runaway budget deficit.
But they, and some Wall Street economists, voiced concerns about just how Congress intends to curb government spending to achieve that goal.
"All my life I've been against it. Now I'm convinced that if we want to have fiscal discipline, we need to impose it," said Stephen S. Roach, senior economist at Morgan Stanley & Co. in New York. "I don't believe Congress has the ability or the guts to wrap (its) arms around fiscal discipline" without a balanced budget amendment, he noted.
A straw poll of money managers and pension fund executives drew similar comments.
"I think it's more important to get some fiscal responsibility in Washington. They have the feeling down there that they can spend money and no one has to pay for it," said Edward J. Safran, president of Merganser Capital Management Corp., Boston, which manages $2.3 billion in assets. "This balanced budget amendment puts a lot of pressure on the existing Congress to cut spending."
Peter C. Thompson, president of David L. Babson & Co. Inc., another Boston-based money management firm, concurred.
"It's a good starting point. It's better than not having one," said Mr. Thompson, whose firm manages $5.8 billion in assets. But he questions how the amendment might actually work, and what government programs or agencies Congress might cut to achieve that goal.
If unchecked, the nation's budget deficit, now around $168 billion, is projected to soar to $194 billion in 1997 and $264 billion in 2002, according to data from Budget Director Alice M. Rivlin. Under that scenario, the deficit would grow to 2.6% of the nation's economy in 2002 from 2.4% now.
The House of Representatives passed a balanced budget amendment late last month, and the Senate is discussing a similar measure.
The balanced budget measure is a top priority in the "Contract with America" political manifesto. Those who favor the measure suggest balancing the nation's budget ultimately would boost economic growth by lowering interest rates and allowing corporations to plow back more into growing their businesses.
"Obviously what we have been doing doesn't work, and maybe this will," noted Erwin H. Will Jr., chief investment officer of the $16.3 billion Virginia Retirement System, who enthusiastically supports the measure. If he had his way, Mr. Will would wipe out all federal government entitlement programs.
Mr. Will's whole-hearted support for the measure is shared by the Financial Executives Institute, a trade group of top corporate financial executives that put the amendment at the top of its lobbying agenda this year.
"We have been living like a family with two sources of income and waking up and finding we are only a family with one source of income," commented Sandy Navin, vice president and director of taxes at General Mills Inc., Minneapolis, and head of the FEI's committee on taxation.
"We have pushed for a balanced budget amendment for the last five years, so now that one has actually been proposed, we are totally supportive," noted Buel T. "Tod" Adams, vice president and treasurer of CBI Industries Inc., Oak Brook, Ill., and head of the FEI's government liaison committee.
Meanwhile, Jim Weiss, executive vice president at the $21 billion IDS Advisory Group, Minneapolis, concurs with Messrs. Safran and Thompson that the symbolic value of the bill might be even greater than what the law might accomplish.
"If the passage of the balanced budget amendment by the House and the Senate proves to be evidence of a willingness to cut spending in the current budget, that will affect the markets now," Mr. Weiss said.
And ultimately, they say, it might matter little if the measure doesn't get approved by enough states to become part of the Constitution.
But Thomas J. Conroy, director of $1.1 billion in pension assets at Consolidated Rail Corp., Philadelphia, worries about just how Congress plans to balance the federal budget. "Who knows what they will throw into the equation there. If they throw into the equation that they will tax pension plans to balance the budget, I'm not for it," he said.
Even more troublesome about the bill is that it puts the economy on automatic pilot, leaving little room to maneuver in downturns, said Robert Brusca, chief economist at Nikko Securities Co. International Inc. in New York.
"It's potentially too dangerous. It could backfire in the sense of making the economy too weak at a time you don't need that," he warned. Moreover, by the time Congress reacts to a recession to override the law and allow increased government spending to jog the economy, it might be too late.
"It may be the worst of all possible laws," said Mr. Brusca, who pointed out that most economists oppose the measure.
And investors might have to pay a high cost in the short term, even though the measure would have a salutary effect on the economy in the long term, noted John Lonski, senior economist at Moody's Investors Service, New York.
"It will immediately add to the uncertainty of the earnings outlook of companies that might be hurt by fiscal austerity," he said. Among the sectors that could suffer are agriculture-related industries, such as fertilizer producers and farm equipment manufacturers that would be affected by cuts in farm subsidies, and health care companies that would be hit by cuts in Medicare and Medicaid spending.
But, in the long term, Mr. Lonski said, passage of the amendment might push long-term bond yields down by more than one percentage point to less than 7%, he said.
"Over time we would expect the drop in interest rates would benefit interest sensitive sectors ... autos might get a second life eventually, and it would most definitely improve the outlook for housing," he predicted.
Under the proposal passed by the House, a balanced budget amendment to the Constitution would not become effective until 2002. After that, the government would not be able to incur a deficit unless three-fifths of the lawmakers in each House of Congress approve it. And a majority of lawmakers in the House and the Senate would have to vote for the government to impose any new tax increases.
The House passed the measure 300-132, 12 more votes than the two-thirds needed.
The Senate may vote on the measure this month. But Senate passage of the bill, which must be approved by two a thirds vote, is uncertain because some Democrats, including Dianne Feinstein of California, have said they will vote against the measure unless it protects the Social Security program from cuts. Robert C. Byrd of West Virginia also strongly opposes the measure.
Even if the Senate approves it, 38 states would need to ratify the balanced budget measure for the law to become part of the nation's Constitution, a process that could take several years.
