Monday, June 21, 2010

Why the US struggles with a Budget

Americans in general seem to be concerned about the Federal Budget Deficit and the level of the National debt. While valid, do these same Americans know how to create a surplus? Is this simply partisanship and saber rattling or are they serious? As an independent voice in the era of politically owned media- this blog will explain the necessities to create a budget surplus and then reduce the National Debt. Be warned, budget discussions are always uncomfortable and often take sacrifices. Since I am not a partisan- this discussion is sure to upset all who are.

Let us start with the latter, reducing the National Debt. This is simple, once we have a budget surplus we must dedicate no less than 50% of that surplus to paying down our debt. So how do we create a budget surplus?

1. National Defense. The most expensive portion of our expenditures is National Defense. From a budget perspective it was pure insanity to enact the tax cuts of 2000 and then start a war in 2001. Even dumber was the choice to start two. Even worse is our continued choice to fight them both.
Since the beginning of time, war constituted assessments on that country's citizens to pay for them. War is extremely expensive and not an attractive behavior for fiscal responsibility. War bonds have been floated, taxes raised, and rationing instituted in the past to help bear the costs of going to war. None of these measures have been instituted in these two current wars that have lasted twice as long as World War II.

Solution: End the wars immediately, we can't afford them. This may cause future danger to some Americans, but safety is never a guarantee. There will always be violence, always. The point is to minimize it in a cost effective manner. In addition, TSA, defense spending, military spending, CIA, FBI, DEA and all other public safety must be cut. Seventy percent of the US Government's budget goes to the military and public safety. Cuts in this arena is the fastest track to fiscal discipline. The balancing act is not what does it take to keep every American safe, but what can we afford to spend to keep the most amount of Americans safe.

Second, to help fill the hole created in our budget, the United States must ensure payment of reparations from the defeated countries of Afghanistan and Iraq. Should currency be insufficient, natural resources that can be easily exchanged for currency would suffice. This second part is very difficult to enforce because the United States was the aggressor in both wars and thereby not truly eligible for reparations. That said, the victor in war has traditionally had reparations paid in exchange for relinquishment of control and/or peace.

Social Security and Medicare. The second largest portion of the Government's budget is Social Security and Medicare. This is the time old political trap because folks eligible for Social Security and Medicare tend to vote at a higher percentage than those not receiving these subsidies. That said, cutting defense spending is not exactly politically popular either. Remember the point of this article is not the political double speak one finds in the Republican and Democratic controlled news stations- this is the straight stuff.

Solution: Social Security and Medicare must be made smaller. Privatization does not work, because whenever the market gets involved the trademarks of markets, greed and fear, take hold. Those trademarks create volatility not suitable for people of age. Since we live longer, the programs need to reflect our ability as a people to work for more years. Remember the intent of these programs is to provide for those who CANNOT provide for themselves. Social Security was never created to be a retirement program. Clearly, there is an age when we as citizens no longer can gainfully be employed, but at the current age limits we see seniors engaged in massive fraud to make sure they qualify for these social programs when it is not yet necessary. Manipulating income and assets is rampant in the United States to ensure qualification. In fact, many financial planners encourage and assist in such crimes. Simple fix, increase the age by ten years retroactively. Remember, this is not about being fair or proper, this is serious budget talk.

Unemployment, AFDC, and Disability. These programs need to be budgeted per the revenue of the Country as a whole and pegged to that revenue as a fixed percentage. Businesses may plan for the future, 5, 10, 20, 50 years, but they do not budget by the year because they cannot forecast sales that far in advance. Businesses budget by the hour by fixing expenses to a percentage of sales. The government must adopt this practice when it comes to entitlement spending.

Solution. Entitlement spending must be tied to revenue in the given quarter. Currently these programs encompass approximately 18 percent of the Federal Budget. So, the Government must ensure that these programs never exceed there intended level of impact. In other words, if the Government chooses entitlement spending is appropriate for 15% of the total budget, then benefits shall be reduced pro rata by any declines in Federal tax receipts and also increased by the same measure. This is simple budgeting. If the Federal Receipts are trending lower by 3 percent per the oodles of payroll and earnings reports generated on a weekly basis, then benefits shall be three percent less in that quarter (notice the cut comes in the current quarter when a businessman budgets, because the preceding quarter is irrelevant and the future is never certain). If those reports show an increase of 6%, then everyone receiving aid gets a raise.

One more important thing about this system is that it is mathematical and cannot quantitatively be abused. If too many people are using the benefits, payouts will be too low because the receipts generated by taxes will be lower and benefits will not create enough money to live well. Subsequently, those that can work and do better will. Once the marginal recipients return to work, those who truly cannot work will get a raise because of increased revenue in the system. From a budget standpoint the equilibrium of entitlements (where people will enter and leave the entitlement programs based on individual payout amounts) described in the preceding sentence doesn't matter because the payments shall never exceed the designated percentage.

Natural Disasters. Simply stated, we cannot budget for something that would happen by surprise. As a result, localities must be responsible for their own natural disasters. Volunteerism, charity and local authorities must right these occurrences.

Environmental Agencies. Simply stated, Environmental Agencies such as the EPA must be self funding without any dedication of tax payer monies.

TARP, FDIC and Redevelopment. The government should always take chances such as these when available as a lender or contractor of last resort because they are necessary to ensure tax receipts for the future and are generally revenue positive. TARP, for example, was a massive success of the Bush Administration. Currently with many loans yet paid back the program is already ahead in sum without those repayments. Should the outstanding debts be paid back without default, the program will yield over a 14% per annum return on investment. That's revenue positive and budget friendly.

Solution: When feasible, and sufficient collateral or equity available, the Government should act in its best interest fiscally. No business could budget itself with flat lining or declining revenue streams. As a staunch believer that raising taxes beyond its optimum level actually reduces revenue, the Government should always tax at its maximum level of efficiency (which is most likely lower than current levels). To supplement income, the Government should make business ventures that provide adequate return on investment. After all, there is little risk since the Government is immune to bankruptcy laws making its investments always collectible.

So after this brief common sense budgeting exercise are you truly concerned about the budget? I can assure you that many cannot honestly answer yes. Most say yes to some of these basic budget principles, but no to others. Many only want to budget when it is convenient. Tea Party constituents are generally not willing to cut defense, even though its the biggest and most over spent portion of our budget. Many others want to end the war, but won't stand for poverty. If one truly claims to be pro balanced budget or budget surplus, there can be no emotion and no gray area. After all, its all just simple addition and subtraction with a few fractions. The numbers are neither good nor evil, they are just numbers. Right?


  1. I don't know why this article makes me so angry! It is logical..... it seems to be right on..... Am I a partisan. TLD

  2. After reading this perspective I agree that solving the budget is impossible without hard decisions. Since politicians are incapable of making hard decisions, I guess this story doesn't end well for our country or democracy. It's an end one could find in Plato's Republic when he deemed democracy the least attractive form of government. BD