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Federal Budget

Four Steps to Fiscal Fitness

3.       Four Steps to Fiscal Fitness

“I’m not worried about the deficit. It is big enough to take care of itself.”
– Ronald Reagan

It seems that every day there is a new story on the wickedness of the national debt and the horrid effect that it is having on our nation. Much of this is true. It also seems that the same people who decry the debt most were those who repeatedly voted in favor of increasing that debt: in 2001, in 2003 and in 2011 through the promulgation and perpetuation of ill-advised and fruitless tax cuts.

They are quick to defend themselves. These tax cuts were necessary to stimulate the economy, to create jobs, to convince investors and entrepreneurs that the US was the place to invest. And yet the economic history of the last decade is one of anemic, jobless growth, fragile and unstable, with rapidly growing income inequality. (1)

Anyone who remembers the state of the nation in January, 2000 can only shake their head in disbelief and wonder “how the hell did we get here?” President Clinton left office with a solid economy and a primary budget surplus, the first US president to do so since Eisenhower. The Bush Administration managed a 1.7 trillion dollar swing in American government finances by 2008.  What led us on this ruinous path? (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Then Chairman of the Federal Reserve, Alan Greenspan, summed it up when he discarded his neutrality during the 2000 electoral campaigned and worried that the Clinton budget surplus might cause the United States to pay off its national debt too quickly! (3)

Please don’t laugh. The hypocrisy of it all would be hilarious if the situation were not so dire.

These are the same people who were responsible for sinking public finances in 2001 and voted to extend these ruinous tax cuts in 2011 even while decrying debt and deficits. Now they would have us believe that the only solution to the budget crisis is to cut spending. Naturally, they never say what spending they plan to cut, leaving us to assume (to hope!) that it is somebody else’s spending, and not our own favorite program.

At Common Sense, we have an equally low tolerance for horse manure and hypocrisy. And I believe the old adage about offering solutions, not problems. So this series of articles is the Common Sense approach to solving the Federal budget deficit and paying down the national debt. I make no promises of painlessness – we’ve splurged for more than a decade, and now it’s time to pay the piper. What I do guarantee with the following proposals is that everyone will have to ante up and pay a fair share.

There is another side to this equation, which is all about getting the economy back on track. God knows we have plenty to do there too. If the economy were to grow like gangbusters, then tax revenues would rise of their own accord. But this series of articles will focus exclusively on fiscal measures, in other words, what the government can do with taxes and spending.

The free lunch is over, folks. It’s time to put the country back to work.

A little bit of background, please

In 2011, the Federal deficit was approximately $1.27 trillion dollars. That’s the difference between the revenues we generated ($2.57 trillion) and the money we spent ($3.83 trillion). If we take a look at the main categories of revenue and expense, we get the following breakdown:

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: The White House, Fiscal 2011 Budget

It’s important to notice that neither income nor spending is uniformly distributed. There are a few really big items and then lots of smaller items which don’t make much difference one way or another. Think of it this way: if you are able to make a 10% cost savings in any one program, would you want it to be in Social Security ($730 billion) or in the Transportation budget (not shown, but equal to $66 billion of “Other discretionary” category)? Similarly, if you were looking at the revenue side, would you focus first on individual income taxes ($1.1 trillion) or customs duties ($27 billion)? We focus on the main levers of the budget if we want to fix it.

That means the following:

  • On the revenue side, it’s all about individual income taxes and payroll taxes. Corporate taxes come in a distant third;
  • On the spending side, there are two major categories we need to consider: Entitlements (Social Security, Medicare and Medicaid) and Defense.
  • The seven areas account for 91% of all Federal revenues and 66% of all Federal expenditures.

Take one more look at the deficit. If we eliminated ALL spending except Defense, Social Security, Medicare, Medicaid and Interest on the debt, we would STILL run a deficit (about $100 billion). There are two conclusions which should be common sense:

  1. We do have to look at Defense and Entitlements if we want to balance the budget;
  2. We do have to look at increasing revenues if we want to balance the budget.

Based on these considerations, Common Sense proposes a 4-part program to whip the federal budget back into shape and pay off the national debt. All of them are important and it’s key to note that implementing these reforms in isolation will lead to failure. It’s all or nothing, folks.

Four Steps to Fiscal Fitness

  1. Simplify the Tax Code;
  2. Reform Entitlements;
  3. Adjust Military Spending;
  4. VAT until we’re Debt Free.

You’ll notices that a balanced budget amendment, the darling of many conservatives and some moderates, is not among my proposals. It is a bad idea. 49 states have some form of balanced budget laws on their books and it certainly worsened the 2008 recession. All it guarantees is a highly cyclical boom-and-bust approach to essential public services.  Europe is currently crippling its economy through a misguided effort to establish zero deficit requirements in national constitutions and ever greater austerity. No responsible government should require a constitutional obligation to balance budgets every single year – our problem is that we haven’t had fiscally responsible government since Reagan took office (with the exception of Clinton’s second term).

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