8/1/2011 2:38 PM ET|
How to really fix the federal budget
Families and businesses count and add the numbers honestly. They invest and plan for the future, and borrow when it makes sense. Washington could take a lesson.
The U.S. budget is broken.
No, no, I don't mean that the U.S. is deeply in debt, so deeply that some wonder if we can ever dig ourselves out. And I don't mean that our annual deficit, an estimated $1.65 trillion for fiscal 2011 year, threatens to soar even higher.
I mean that the actual federal budget, the mechanism that's supposed to tell us whether our finances are in good or bad shape, and whether they're getting better or worse, is broken. It doesn't give us an accurate picture of our financial health. And as for giving us guidance for where we're headed, well, it's like using a meat thermometer to gauge the weather, like timing a soft-boiled egg with a sundial, like deciding what to wear by looking at average daily temperatures, like . . . .
Don't get me started.
As a result the entire battle over raising the debt ceiling, cutting the annual federal budget and even, maybe, raising taxes (excuse me, enhancing revenue) someday is a battle fought between two armies blundering across the landscape wrapped in the deepest Scots haar fog and whacking about with their claymores at friends, foes and innocent sheep alike.
And a balanced budget amendment? Nobody can possibly decide whether it's a good idea, a disaster, or a harmless joke, given the present state of our governmental budgeting. To start, what do the terms "budget" and "balanced" even mean in Washington?
OK, enough of a rant. Let's get down to brass balance sheets. We can start with those definitions for "budget" and "balanced."
On- or off-budget?
Look at the scorecard constructed by the Congressional Budget Office for President Barack Obama's fiscal 2011 budget. Revenue, estimates the CBO, will come to $2.27 trillion. But note that only $1.7 trillion of that is "on-budget" revenue according to the CBO. The budget office calls the additional $570 billion "off-budget" revenue.
The same terminology turns up on the spending side. On-budget spending amounts to $3.2 trillion, with off-budget spending adding up to $497 billion.
If you're looking to balance the something called THE budget, what numbers do you look at? And what is off-budget spending anyway?
Turns out most of what's off the budget comes from the collection of Social Security taxes -- revenue -- and payment of Social Security benefits. That money goes into (and flows out of) the Social Security Trust Fund and doesn't get counted as part of the budget. Although as you know if you've been following the current debate about the debt ceiling, Social Security checks do seem, strangely enough for an off-budget item, to come out of the U.S. budget. (Another off-budget item is the U.S. Postal Service. And some spending moves between off- and on-budget. The costs of the Iraq War were initially covered through special emergency appropriations, for example, and weren't "on budget.")
Is balanced an unbalanced approach?
Let's say you define what you mean by budget, maybe by putting all the off-budget items into the budget to create what's called a unified budget. You've still got another problem definition. What do you mean by "balanced"?
Let's say, it's the 1990s and the Social Security Trust Fund is taking in more than the government is paying out. That was true during much of the Clinton presidency (and, in fact, until relatively recently). But you know that this is a temporary situation. As the baby boomers continue to age, the time will come when the trust fund is taking in less than the government is paying out. So considering the absolutely predictable future obligations, when is the budget balanced?
That's a problem with the expected. Now, how about the unexpected? Hurricane Katrina made landfall near New Orleans at the end of August 2005. By October 2005, Congress had appropriated $62.3 billion in supplementary spending for disaster relief and recovery. Even then, voices in Congress argued against that spending because it would increase what was seen at the time as a large deficit.
Or how about the expected unexpected? By this, I mean the business cycle. We know -- or at least everyone except Alan Greenspan knows -- that the economy will go through boom and bust cycles. During the booms, tax revenues will soar and expenditures for some things -- unemployment benefits, for example -- will fall. If the government does nothing to change spending -- such as passing a huge tax cut -- the budget will move toward surplus. During the bust years, tax revenues will fall as the economy slows and the costs of things such as unemployment benefits will climb. The budget will move toward deficit, especially if the government decides that the downturn is severe enough to justify increased spending on infrastructure projects, say, or tax cuts or credits to spur hiring.
We know from the history of the Depression -- from the budget-balancing efforts of President Herbert Hoover and in the very earliest part of President Franklin D. Roosevelt's administration -- and from the 1937 relapse into Depression -- that balancing a budget during a downturn, which requires cutting government spending, makes the downturn worse. When the bust in the cycle produces what some economists call a demand recession, marked by falling private demand for goods and services, increased government spending on goods and services can lessen the depth and duration of the downturn.
So is your definition of a balanced budget one that is always in balance no matter what strikes the economy? Or is it one that says "emergency" spending is OK, even if it puts the budget into the red? (And if the latter, you still have to define "emergency.")
Let me throw one more element into the soup.
The need to invest
Not all government spending is the same, although the current budget treats it as such. There's a huge difference between spending money to pay salaries for government workers, for example, and spending money to build a highway or to expand the port of Charleston, S.C., so it can handle the bigger ships coming through an expanded Panama Canal.
One is spending -- however good and noble the cause -- that covers a temporary cost. Once the money is spent, the government has to turn around and spend more tomorrow. The other is an investment that will likely pay dividends if not to the government then to the economy as a whole. Nobody argues that when General Electric (GE, news) or Exxon Mobil (XOM, news) invest in a new factory or a new refinery, they shouldn't do so if they have to borrow the money. As long as the return on the investment is higher than some hurdle rate, then borrowing the money makes sense.
How the budget needs to change
I'd say the changes that our budget needs, at the least, are a division into investment and general expenditures; a countercyclical scoring system that defines "balanced" in the context of the economic cycle; and a unified budget that gets rid of the deceptive practice of pretending that some expenditures of taxpayer money don't count because they're off-budget. I'd call these pie in the sky, except that a few other countries around the world have created budgets like these.
Chile, for example, has dealt with the harsh realities of being one of the most cyclical economies in the world -- that's what happens when your economy is dependent on copper -- by creating a government trust fund, financed by a tax on copper that rises and falls with global copper prices, that is available during years of economic bust. Independent panels of independent economists rule on when the economy has entered such a bust, and their decision authorizes the government to dip into the economic-stabilization fund.
Norway, faced with the reality of a huge surge in revenue from North Sea oil and the realization that this resource wouldn't last forever, created a sovereign wealth fund designed to take some of the cash flow from that resource and invest it for the future, either in projects that would produce income in coming years or in investments designed to create new jobs or improve the competitiveness of existing Norwegian industries. This prepares the country for the day when the oil runs out.
It's hard for me to see why Chile and Norway can create budgets like this and the United States can't. (A few more weeks of watching Congress in action, though, and I might be willing to entertain the notion that Chileans and Norwegians are just smarter than we are. We did elect this circus, after all.)
How real families budget
Americans make these kinds of decision in their own budgeting. We borrow to put a kid through college, because that kind of deficit spending makes economic sense. I don't buy season tickets to the Yankees, as much as I like baseball, because I've got a new business that needs all my capital -- and then some. My upstairs neighbors have worked hard to maintain a great credit record and used that recently to refinance their mortgage, cutting their monthly interest payments by more than a third.
When I hear the politicians try to score points by creating some simple-minded cliché of the American family sitting at their kitchen table and deciding to "live within their means" -- by not sending Johnny to college and by not helping Janie finance her business, I assume -- I feel really angry. American families do better than that. They make distinctions between good spending and bad. They understand what it is to invest -- even if it sometimes means taking on debt. And they put money aside for a rainy day -- even if sometimes the rain turns into an unexpected flood that overwhelms those preparations.
The federal government should do at least as well. It should start by changing how it keeps track of the way it spends our money. Do that and then we can talk about what spending needs to be cut and how to balance a budget in a way that actually means something.
At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. Find a full list of the stocks in the fund as of the end of March here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
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Step #1: How about starting by removing Social Security from the Unified budget. Make sure that the 'trust fund' stands on its own can prove (every year) that the system has 30 years of solvency. If not, than benefits are adjust automatically. Taxes can also be adjusted through congressional action.
Step #2: Do the same with medicare.
Step #3: Reserve x% of the Federal budget for disaster savings, to be allocated based on presidential discretion. The point of a republic is to empower 'representatives' to actually make decisions once and a while. For years with multiple or extreme disasters, see Step #4.
Step #4: Require congress to set a "pay-off" schedule whenever military action is authorized that require deficit spending. For example, we vote to go to war in Iraq, and at the same time require that this conflict is paid for over ten years with a 1% across-the-board tax increase. That would sure light the fire under politicians as to whether we REALLY should be involved in these conflicts or not.
271,250,000,000.00 is 271.25 Billion dollars.
Good start, this covers the Army and Marine Corps Budgets.
Flat Tax Rate: Everyone Pays 10%, and before people get all up in arms about the guy that makes a million versus the guys that makes a thousand here is how I look at it. Bob makes $10000 a year, after tax he has $9000. Bill makes $1000000, and after tax has $900000. The US population is right around 310 million people. If one quarter ot them are working and making and average of $35000 ( Wikepedia) 77.5 million times 3500 ( 35000 x .1) that is( and count the zeros)
Very easy to fix this problem. I can name it in two words..."FLAT TAX"
A flat tax of whatever percent...oh, I don't care 15%, 17%, but the same tax to every person in the US, regardless of income and NO DEDUCTIONS...PERIOD! Income is income, whether it comes from capital gains, inharitence, working wage, wellfare, gifts, sales of property...NO DEDUCTIONS! If you are poor, 15% of $24,000 a year income is $3,600 anual tax or $9.80 a day. $240,000 anual income, then tax is $36,000 a year or $98.63 a day. $12 million a year income @15% flat tax is $1.8 million per year NO DEDUCTIONS. No tax loop holes to use or hide money. No write off's to church, or performing arts...NONE. If this were done accross the aboard, the US Treasury would receive around $24 trillion dollars a year.
Along the lines of what ldrive55 said, I see three industries in this country that are making a ton of money off the working class and those just scraping to get by:
The Big Oil companies
The healthcare industry.
Look at the profits of these companies, consider all the entitlement payments the gov't has to make (Social Security and Medicare) and consider where those dollars go.
Then consider the basic freedoms in this country that provide the opportunities for many to earn large salaries. I see multi-million dollar sports contracts being awarded in this free economy, are they paying their fair share?
Unless we do such basic analysis, we'll never dig ourselves out of this hole.
Geithner is saying he doesn't know if the credit rating will be affected by "this spectacle" in Washington. He and his friends Barney Frank and Chris Dodd caused this mess.
Our rating is based on what, the same people who gave the Housing Mortgage Defaults a AAA rating so people would buy them and lose all their money?
Maybe the way to get out of this mess is to take away Moody and S&Ps rating services. After all if you have enough money, you can buy the rating from these people. It's been done in the past and will probably be done again in the future.
The real end to spending is not to spend. If we continue, no wonder we will be called the PIIGS of the American Continent like Putin is saying. CUT, CAP and BALANCE is the only way we can get out of this mess.
It may be painful, but getting away from addiction is always painful.
Jim says: "...American families do better than that. They make distinctions between good spending and bad. They understand what it is to invest -- even if it sometimes means taking on debt. And they put money aside for a rainy day ..."
Jim, are you serious or trying to be sarcastic?
American families in general, like the government, take debt to finance useless spending (flat-screen TV, vacation, etc). They also do NOT save for rainy day.
Are we talking about the same country? Am I missing something?.
When the WH talks of cutting spending, they are talking about the reduction of increase. There is a built in increase of 7% for spending every year. I don't know about you, but when my revenue decreases I don't automatically increase my spending the next year. So we need to drop the 7% increase or freeze spending increases until we balance the budget. Now, how do we increase revenue? By increasing taxes? What happens when taxes go up? Companies find ways to stay profitable by laying people off and passing those tax increases on to the consumer. So now you have fewer people working, fewer people paying taxes, the cost of goods and services increase...how does this create more revenue??? We need to lower taxes (a flat tax would be great) so business become MORE profitable. Then they will hire more people, give people pay raises and bonuses. They will buy more homes, boats, travel more....ALL of which creates more jobs. More jobs means more people paying taxes which INCREASES revenue. Liberals will argue that the deficit increased when Reagan lowered taxes. The deficit did increase, but REVENUE increase dramatically. The problem, the liberal Congress spent $1.8 dollars for every $1 of revenue. So the trick is to increase Revenue while freezing or if possible cutting spending! It can be done but with the politicians in DC it wont be likely. We need Term Limits!
I was so happy to see someone admit that the second half of the depression happened ONLY when the government cut spending. Some people really can’t understand history. However even he did not address the money we spend on our military which is more than most other countries combined.
Our roads bridges, dams and seaports are falling apart with much of the work not upgraded since the great depression. I am glad we got it done then or we would be in big trouble now. The so called free trade acts (no such thing really exist) and the Corporations have pushed China into the number two spot heading for number one and all we can think of is to take more from working Americans that have no place else to go.
We know from the history of the Depression -- from the budget-balancing efforts of President Herbert Hoover and in the very earliest part of President Franklin D. Roosevelt's administration -- and from the 1937 relapse into Depression -- that balancing a budget during a downturn, which requires cutting government spending, makes the downturn worse
I trust Mr. Jubak is just playing "fantasy football" here. C'mon. Does anyone think that our government will run a true surplus in their lifetimes?
I have a question for all the Keynesians out there. For decades, year in and year out, the U.S. has consumed more than it produces. It has borrowed the difference abroad. Furthermore, the Feds have created over $14 trillion worth of demand "stimulus".
How's that worked out so far, and how much more "demand" do you want to create?
Of course, the resolution of the present debt crisis, when it’s all said and done, is out of our hands. Our elected officials, no matter their persuasion, have voted and will be coming home during the August recess and have to face their constituents. None should be applauded for a job so very badly done nor should the President.
Cuts in spending are a given in our future and it appears both parties want us to believe they have voted for this today. However, after the November 2012 election, they will get back to spending again, so I don’t believe a word of it. I have no objection to raising Corporate taxes and closing their loopholes, nor to our personal taxes modestly increasing across the board; the largest increases added to those making over $250,000. However, I would put this clause in the bill as a Constitutional Amendment; “Every Dollar taken in from this tax increase shall be used to pay down the debt. NONE can be used to increase Government spending. Money borrowed by raising the Debt Ceiling shall only be used to pay existing obligations. ” I would like this to be a Constitutional Amendment because by now, we should all know and believe that two years from now, both parties would quietly get rid of the clause in a midnight vote; the same way they give themselves and their staffs pay raises.
In the interest of discussion, what other messages should we communicate to our elected officials while their on August Recess. I believe it should be, no matter their persuasion, that they should understand they are to return to Washington as either a moderate Progressive or moderate Conservative and to really begin to address the nation’s financial problems between now and November 2012. No more catering to their hard core bases that do not even remotely represent the majority in this great nation. If they refuse, be sure and let them know they will hit the road come November 2012 and then start looking NOW for candidates that will run against them, party affiliation not required. They need only have a deep seated belief a Country governed in moderation is more likely to achieve Jefferson’s basic belief in the ideal government.
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness. That to secure these Rights, Governments are instituted among Men, deriving their just powers from the consent of the Governed.”
The time has come for our elected officials to HEAR from the Governed.
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