27 December 2010

Problem Solved?

In my last post, I talked about, based on the time value of money, our national debt will, as some point become completely unmanageable.  At the end of that post, I promised a solution to the looming problem, and now I'll try to deliver.
The first step in the solution process is, of course, getting the federal budget under control.  If you're spending all your money on lottery tickets and booze and then using your credit cards to buy groceries, it's going to be pretty hard to get those cards under control.  So before we can start paying down the debt we have to stop borrowing.  

The difficulty is that it's hard to convince folks to be frugal when they're spending other people's money.  It's obvious that the politicians aren't spending their own money in Washington.  In many cases not only does their spending not cost them anything, it actually puts money into their campaign war chests-donations from the people the spending benefits.
What's less obvious is that the people who vote for these big-spenders aren't spending their own money either. Nearly 50% of American voters don't pay any federal income taxes, and therefore can only benefit financially from increased government spending.  Not only do they have no incentive to reign in their elected representatives, the voters often have a vested interest in encouraging fiscal responsibility in Washington.  So how do we correct that?  How about we force Congress to match each dollar in increased spending with a dollar in new tax revenue, distributed across the entire tax base, proportional to income?  Each new spending item would result in a percentage increase in taxation for each and every working American.  That way the burden of the new spending would be borne by all American workers and each American worker would have a vested interest in reigning in their politicians.  It would also guarantee that all new spending is paid for and would not continue to add to the federal debt.

Now, that takes care of new spending and will keep the budget deficit from growing.  However, in order to reign in the debt, we'll have to turn the budget deficit into a surplus.  That means cuts to existing programs and increasing tax revenues.  We'll look at cuts first.

A lot has been made about budget earmarks and how they're financially irresponsible and should be eliminated.  This is really much ado about nothing.  While much of this pork-barrel spending is wasteful and unnecessary, much of it is very much needed and worthy.  Earmarks, while they can be and often are abused, allow Congressmen a say in how portions of the federal budget are utilized in their districts.  They put money in the hands of people with a better, albeit imperfect, knowledge of the issues on the ground.  The alternative to earmarks is to allow the faceless and detached agencies of the executive branch to distribute funds as they see fit.  No, while earmarks should be closely scrutinized, they shouldn't be eliminated.  Besides, earmarks represent only about $20 billion .  That seems like a lot until you consider that President Obama's 2011 budget proposes a total of nearly $3.7 trillion in spending.  Cutting out earmarks would be roughly equivalent to the average American family cutting out the cost of cell phones and cable television..

By comparison the budget provides $738 billion each for Defense and Social Security and $498 billion for Medicare.  All entitlement spending amounts to about $1.9 trillion; over half of the budget.  When you add entitlement spending to defense spending and throw in interest on the debt of $250 billion, you get a total of $2.9 trillion dollars.  The projected budged deficit for 2011 is in excess of $1.26 trillion.  This means that if you left defense and entitlements alone and cut the rest of the federal government entirely, we'd still have to borrow $260 billion next year.  The hard truth is any meaningful spending cuts will have to come from these sacred cows.  Cutting anything else is just posturing.  Next time we'll take a somewhat detailed look at how we might cut these areas.