(MONEY Magazine) – TALK ABOUT BEDLAM INSIDE THE BELTWAY: After Senate majority leader Bob Dole (R-Kans.) spent three days struggling in vain to ram through the balanced-budget amendment, he ended up voting against it. The switch was a ploy, of course. By voting with the winning side to defeat the amendment, Senate rules allow him to bring back the popular amendment for another vote closer to the 1996 elections.

At least Dole's U-turn makes sense. But how do you explain Sen. Joe Biden (D-Del.), who a year ago denounced the amendment as an attempt to "make Herbert Hoover's economic policy a constitutional mandate," and then voted for it on March 2-for real. Or Sen. Tom Harkin (D-Iowa), who also voted aye even though he has opposed similar proposals in the past. Or Sen. Byron Dorgan (D-N.D.) and Sen. Wendell Ford (D-Ky.), who helped defeat the amendment but have supported the concept on other occasions.

Apparently, the idea of a balanced budget gets politicians so worked up that they can't remember which side they're on.

What's behind the flip-flops? It's simple. Americans want the government to reduce the federal deficit but don't want any cuts in entitlements-Medicare, Medicaid, Social Security, veterans' benefits, unemployment insurance and the like. So a lot of politicians end up trying to support both sides of the issue.

Here's the point, though. Whether a balanced-budget amendment ever passes or not, legislators are going to cut the deficit-and entitlements. They have no choice. They've already run through the easy stuff, such as assaulting the military budget and abusing social programs. Both the Bush and Clinton Administrations shrank discretionary spending-from 9.7% of the total economy in 1988 to 7.7% today. But that wasn't enough. The deficit remains stuck at around $200 billion, because entitlements have swelled from 10.3% to 12%. And if they keep growing, by 2005 they could eat up another two percentage points of the economy, or an additional $200 billion a year, at least.

We don't think that will happen. Now that more than 70% of the voters say they want the deficit cut, political pressure is intensifying. Before long, the government will have to start whittling down entitlements. The alternative--letting the deficit keep growing--would be even more painful, leading to inflation, soaring interest rates and a collapsing dollar.

The bottom line: Once investors see entitlements get the ax, they'll acknowledge that serious deficit reduction is under way by helping trigger a long-term decline in interest rates. Bonds figure to boom, along with other income investments such as electric utilities.

The trend to lower rates also will be helped by continued moderate inflation. Labor costs, which account for two-thirds of long-term inflation pressure, are rising a modest 3% a year. Although other costs may push inflation to as high as 3.5% to 4% in the next two years, we think it will peak there. Once the next recession hits-perhaps in 1997 or '98-long-term interest rates will likely drop to less than the 22-year low of 5.8% we saw in October 1993.

If we're right, bonds are a great buy now. If yields on 30-year Treasuries drop from today's 7.6% to 5.5% within the next five years, bondholders would enjoy an annualized return of around 11%. If a temporary rise in inflation pushes yields to above 8%, the subsequent fall to 5.5% in five years would mean an annual return of more than 12%. So consider any significant decline in bond prices as a buying opportunity.

A similar case can be made for electric utilities and other income stocks (those with dividend yields above 4%). Though such stocks could suffer if interest rates edge up during the next six months, they could easily return 15% or more a year once rates begin the major decline that we foresee. (For more on utilities, see the February Forecast column.)

So let the balanced-budget debate continue--but don't let the babble distract you. Spending cuts will power a boom for income investors. And if you buy bonds and high-yield stocks at today's prices or less, you'll enjoy 10% to 15% returns for the rest of the century.

Wall Street editor Michael Sivy is a chartered financial analyst and a former Wall Street research director.