Balancing the Budget–Part 1

Everyone is talking about how to solve the federal budget crisis.  Of course, people have been talking about this subject my whole life.  It’s a heated topic with no easy answers.  And it’s a more of a crisis in bad economic times than in boom times, so there is a certain amount of the sky is falling psychology behind the topic.  However, the debt of the United States is growing so large that maybe the sky really is about to fall.  Who really knows?  It does seem prudent to slow the debt we’re incurring.  It would be impossible to balance the budget in one year without massive spending cuts even if we set aside the current national debt as a separate issue.  It could take a whole generation to really get close to balancing the budget.

There is an excellent graph at the New York Times showing Obama’s 2011 Budget Proposal.  It illustrates the sizes of the various expenditures in relationship to each other.  However, you can read the details at the Office of Management and Budget.  For the average citizen looking at the budget is just mind boggling, and for most people they just think, “Hell, let the experts worry about it.”  The trouble is our government is in political gridlock with two opposing ideologies claiming they know what’s right.  To solve the problem will require thinking and acting out of the box.

There are a number of think tanks that focus on the federal budget which have web sites you can study.  I recommend studying these sites rather than listening to politicians or watching the news on television.  They all have a political bias so I recommend reading more than one.

Personally, I have four recommendations that I think would help working on the problem.

  1. First, don’t consider the budget as a whole, but break it down into parts and lets research and discuss the parts.  Don’t think of it as one giant problem, but many smaller problems.
  2. Remove Social Security from the annual Federal Budget.  Consider it a separate insurance system paid for by FICA.  Don’t allow the Federal budget to use FICA income and make it pay back what it’s borrowed.  Consider Social Security a separate issue.
  3. Let’s really examine the whole issue of defense spending.  It’s been an untouchable sacred cow for too long.  And it hasn’t been the defense budget since the cold war ended – it’s become a world police force and nation building organization.  The whole system needs a rethink.
  4. Let’s have a moratorium on tax cuts.  Until the national debt gets under control lets work on spending cuts and don’t allow any more tax cuts until the budget is under control and we can afford them.  If our country is about to go down the drain because of national debt then we really should be talking about tax hikes.  It’s insane to talk about paying off debt and reducing income at the same time.

That still leaves a million issues to argue over, but I don’t want to write about them for now, that’s why I called this post part 1.  My friend Bill in his blog “That’s interesting …” has been running a lot of posts about the battle of the budget.  It’s such an emotional hot issue with way too many Chicken Littles running around.  Are the press and politicians creating a panic that need not exist?  Would a thriving economy just automatically solve these budget problems?  Are politicians assuming it’s the end of the world as we know and have started a fight over a shrinking pie?  I don’t know.  Politics has become so contentious and ungentlemanly that I want to quit watching all news programs.

JWH – 2/19/11

16 thoughts on “Balancing the Budget–Part 1”

  1. Thanks for the plug, Jim!

    The deficit is an important issue, but the worst economic collapse since the Great Depression is a terrible time to address it. After all, the deficit always increases after an economic collapse, since spending on social programs automatically increases as people lose their jobs and tax revenue automatically decreases for the same reason (and due to much lower capital gains, too).

    The last thing you really want to do when the economy is already weak is to cut government spending (and especially employment). That just makes the economy even weaker, compounding the problem. Unfortunately, that’s what state and local governments have been doing. That little bit of federal “stimulus” has hardly even offset cuts in state government (especially since 40% of that was tax-cuts, too).

    Instead, we need to lower the deficit when the economy is in GOOD shape, as Bill Clinton had indeed started to do. Unfortunately, Bush’s tax cuts and insane war-mongering caused the deficit to skyrocket even before this economic collapse. So we STARTED the collapse in a deep, deep hole. That really hurts.

    Of course, we’re not even close to making things better now. In fact, we’re still making things worse with continued tax cuts, especially for the wealthy (which doesn’t stimulate the economy much at all – trickle-down economics, as we should all recognize by now, doesn’t work).

    We’re at a political impasse in regards to doing anything at all productive, and I don’t see that changing, either. I’m not optimistic.

  2. These times have created an opportunity for the radical conservative to go on a witch hunt to downside the federal government. I’m sure there is a lot of fat and pork to be found, but I’m afraid their ideology will inspire them to cut what they don’t like philosophically, rather than what is unneeded or wasteful.

    I wonder if the liberals will retaliate by going after programs they don’t like?

  3. Wow that chart at the New York Times was just about the coolest thing I’ve ever seen. Even a dullard like myself could understand it when it’s just colors and boxes.

    I agree with all of your points and look forward to you further examining these issues.

    Obama campaigned as an anti-war president. I remember he said about a million times that he didn’t vote for the Iraq war. And yet he hasn’t reduced military spending at all. So either he was lying to us then, or he was unprepared for the realities of the world situation.

    As Obama makes “compromise” after “compromise” which in reality resemble something more like giving up his principles without much of a fight, I become more convinced of the latter and fear that what his opponents said about him during the election was true: This guy is in way over his head.

  4. John, I’ve been disappointed with Obama, but I don’t see any contradiction in his military policies. He spoke against the Iraq War before it began (he wasn’t in the Senate then), but once we’ve begun such a foolish war, the situation is far different and our choices tend to be all bad.

    We made a mistake invading Iraq – and probably Afghanistan, too – but there are no do-overs. We have to live with our mistakes.

    Now, in Iraq, it’s Obama who proposed the troop removals that Bush ultimately followed. Republicans criticized Obama for it, but eventually, that’s the plan they adopted themselves. Obviously, we’re not completely out of Iraq, but since we invaded the country, we have a certain responsibility now.

    In Afghanistan, I don’t know what to do, and I doubt if anyone else does, either. We could have won the war – and the peace – but we blew it. We ignored Afghanistan in favor of a much more “fun” war in Iraq. We screwed up big time! But that’s all in the past. What now?

    Afghanistan, unlike Iraq, borders nuclear-armed Pakistan. That makes it more difficult, and also more important, than it would otherwise be. And when you see school-girls who don’t let acid thrown in their face keep them from attending school, well, can we just abandon those people?

    Again, if we hadn’t invaded the country, it wouldn’t be our responsibility at all. The time to think about that was BEFORE we started the war, BEFORE we gave those people hope. Now,… well, it’s a lot harder. I don’t see ANY good options now. Obama’s plan – to give it a chance, but not an open-ended one – seems to be the least objectionable, I’d say, but I know that reasonable people can disagree.

    Either way, Obama hasn’t started any NEW wars. He hasn’t invaded any OTHER countries, just to parade around as “Commander-in-Chief,” playing toy soldier with real people. After Bush, that’s something, at least.

    My biggest problem with Obama is that he’s too willing to “compromise” unilaterally (with people who will never compromise with him). And instead of using that great bully pulpit to persuade the American people to our way of thinking, he tends to adopt and affirm right-wing rhetoric, even when it’s demonstrably false.

    I think he’s trying so hard to reach out to the right that he fails to stand up for his own side. Heck, he criticizes his own supporters more than he criticizes his sworn enemies. Of course, he was never as liberal as his supporters hoped (and as his opponents have portrayed him). He’s a moderate Democrat.

    I just wish he’d govern like he campaigned – boldly, courageously, inspirationally. Instead, he’s timid, too eager not to make waves (when just EXISTING as a black Democratic president, he makes waves). Democrats are so discouraged they didn’t even bother to vote in November. How did THAT happen, after the wild enthusiasm in 2008?

    Sorry, I guess this is a little off the topic of the budget, isn’t it?

  5. I don’t know Bill, and I’ll be the first to admit I don’t understand the detials of the wars. However, I do understand that Obama is tappering off the war in Iraq. That would suggest to me that we’d be spending less money and using less troops, but instead we are increasing the money we’re spending and moving all the troops over to Afghanistan. Maybe this is all necessary to “win the war,” but I wish we saw evidence that the military was reigning in spending, or justifying its spending. Anything to suggest Obama isn’t giving them carte blanche.

  6. All I know is that we are the only builders left standing in our part of Arizona and we are just trying to hang on to what we have….our only saving grace is that we are debt free. Honestly, tax credits are the last thing on middle self-employed working class…almost all of our friends are self employed and we see nothing in the future for us.

  7. “If our country is about to go down the drain because of national debt then we really should be talking about tax hikes”

    I couldn’t disagree more. Our government is not responsible with its spending now. Why should we give them MORE money to spend irresponsibly? We know from other walks of life that throwing money at a problem does not solve the problem and taking more money away from the average worker through tax hikes is not going to make the government suddenly become more fiscally responsible.

    1. I’m not sure the government is that irresponsibly. Sure there is lots of waste, but cutting it wouldn’t be enough to get us out of debt. It would help. But to actually get us out of debt will take a surge in the economy, spending cuts and new taxes.

  8. Come on James. Our government got us into this debt crisis. How can you say with a straight face that they (we) aren’t irresponsible. Most Americans are saddled with debt because of irresponsibility and our government is no different at all. I don’t think we should be cutting taxes now, don’t get me wrong, but I don’t think giving the government MORE money is any way to fix the problem. It is no different than people who live irresponsibly and then get a raise thinking that will solve their problems and soon they are spending all that extra money too and never have anything to show for it.

    I do like your idea of looking at the budget as small parts and tackling them in that manner. It is the only way to successfully make changes. We’ve got to become a country that lives within our means. Dumping more money into the problem is not going to fix the problem. It only creates a false sense that things are alright when they are not alright in any way shape or form. Spending cuts do need to happen, but a bunch of new taxes may create the illusion that things are getting better but time will demonstrate that if they behavior hasn’t changed then soon we will be right back where we started if not in much, much worse shape.

  9. Actually, during good economic times, back in the Clinton years we were moving toward’s getting out of debt. The Bush tax cuts, an unneeded war in Iraq and Wall Street greed has put us where we are now, none of which I directly blame on the government.

    But Carl, you should point out some specifics where the government is being irresponsible. I’m not sure you can point to anything that in a good economy would matter.

  10. I’d say that there are a couple of things wrong with that, Carl. For one, we got into this mess because of tax cuts – and because we refused to raise taxes to pay for the TWO wars Bush started.

    Since Reagan, the Republican mantra has been “tax cuts, tax cuts, tax cuts.” And since it was politically popular, all too many Democrats went along with it, too. But that promised “trickle down” effect never occurred. The more we cut taxes, the higher the deficit went. (Only those few times where we RAISED taxes did the deficit improve – and without harming the economy, either.)

    When do we start to realize what a mistake we made? When will the evidence start to convince us that we need to reverse course?

    And secondly, this economic collapse itself is the reason the deficit has gone even higher now. The CBO forecast this even before Obama took office, simply because recessions AUTOMATICALLY decrease government revenue and increase government expenditures (after all, that’s why we have government safety nets in the first place).

    So the best thing we could do now is to get out of this slump. Cutting government spending would make the slump even worse. In fact, the constant cuts by local and state governments are doing just that. Federal stimulus spending was WAY too small, since it has been offset by decreases in spending at other government levels. That’s not stimulus, not at all (plus, much of that “stimulus” was – again – tax cuts, which are a very expensive and inefficient form of stimulus).

    We used to be smarter than this. We used to understand that spending cuts AND tax increases were both needed to lower deficits. But since “Reagan proved that deficits don’t matter” (to quote Dick Cheney), we’ve been on the wrong path in America.

  11. WCG and James: You are making my arguments for me. Your statements prove my point: the government is irresponsible. I never once said I agreed with or wanted tax cuts. What I said was that I didn’t agree with giving the government MORE of our money when I don’t believe they handle our money well now. The fact that the government couldn’t see beyond their own noses what tax cuts would do to the economy is as much a proof of their irresponsibility as anything else.

    I would also point to the massive debt this country owes other countries. The United States used to be the nation that loaned other countries money. Now we owe everyone and there is no foreseeable way in which that debt will ever be repaid. I believe both are examples of irresponsibility. Loaning to everyone who appeared to need it is irresponsible, as is borrowing ever increasing amounts of money.

    Don’t confuse my statements with a democrats vs. republicans issue, which is what I see both of you doing. I’m saying government is irresponsible with their spending. I’m not blaming that on any political system. I blame them all equally.

    You ask me to prove that government is irresponsible with finances and I admit that I am using sweeping generalizations largely because I don’t particularly care about the tinier details of government. Where I believe my generalizations are true is in the fact that we are a nation that is broke, in a debt spiral that we will never come out of unless the nations we owe money to just write off that debt, and each Administration that comes along manages to spend more money without successfully generating enough money to cover our expenses and save for the future. If you were looking at a household and seeing them in massive debt, continually spending money on things they cannot afford, and trying to find ways to take more money from someone else rather than finding ways to create more wealth and more responsibly spend the money they do have you would call that household “irresponsible”. America needs to get its household in order.

  12. Here is a very tiny example of what I consider irresponsibility when it comes to the government’s attitude about money:

    I have a friend who builds and installs cabinetry. Over the last few years he has taken on several HUD projects, installing cabinets in new low income housing units. In order to land these jobs, he needs to agree to a number of things. One of those is the wages earned by the employees. In a midwestern economy where he is paying his employees $15/hr. as a competitive wage in the business, they earn nearly $40 an hour for these HUD jobs. It doesn’t cost him anymore because the government pays him the money to pay his employees that wage. On the flip side of that, his business earns nothing significant in comparison to any other job he does. It is great for the employees at that wage. But couldn’t the government set rules in place for government funded projects that could take that $40/hr and turn it into two $20 an hour jobs?

    I realize I am oversimplifying, but there have been decades of news exposes and reports about the government overspending for things that are done much more economically in the private sector.

    It is stuff like that which I don’t understand. I don’t see that as a wise use of money. Instead of trying to get the most bang for the buck it appears to be a case of trying to spend the most buck for the bang.

    And on another note, I guess I should clarify that I am not averse to all tax hikes. While I love buying stuff online and not paying taxes for it in the state of Missouri, I do think it would be wise for the state to go ahead and levy a reasonable sales tax on goods bought online. That would add a tremendous amount of revenue and the choice then remains in my hands about whether I want to pay those taxes or not based on what I consume.

    What I don’t want is the government deciding that my income tax needs to be higher. I think they get more than enough of my income already.

  13. Democracies are irresponsible because their citizens are irresponsible. So what? What’s the solution to that? A democracy is a terrible form of government, true. But all of the others are even worse.

    You don’t say HOW our government is irresponsible, though. In order to fix something, don’t you have to know how it’s broken? I’m telling you that it’s mainly broken because of tax cuts, not spending (with the notable exception of military spending). If you disagree, then please tell me why. What in particular is irresponsible?

    Take a look at the first graph here. It shows that federal discretionary spending, as a percent of GDP (which tells us if we can afford it), has dropped. And even without drastic cuts, it’s not forecast to rise much at all.

    Medicare – health care in general – is the big long-term problem. But if you look at the deficit (check out the graph here), the biggest contributors – by far – are the Bush era tax cuts, the two wars in Iraq and Afghanistan (irresponsibly fought on credit), and the economic downturn itself (and tax cuts for the rich had a lot to do with that, too). Note that interest payments on the existing deficit – a big expense in itself – are included in what created the deficit in the first place.

    As I say, in order to get our household in order, first we have to understand where we went wrong. In what way were we irresponsible. Well, Republicans wanted to “starve the beast” with constant tax cuts (especially for the wealthy), until government was small enough to “drown it in a bathtub,” to use Grover Norquist’s famous phrase. They also suggested that all these tax cuts (and the war in Iraq, too) would pay for themselves. They were wrong. This was irresponsible.

    You need to know exactly how a household is irresponsible before you can fix it, too. Is it irresponsible to go into debt to finance a college education? To buy a reasonably-sized house? A person might be irresponsible in maxing out his credit cards for big-screen TVs and such, or he might be irresponsible simply because he lies around all day and doesn’t work (like me). The solution is different depending on the details.

    OK, so we’re irresponsible. But exactly HOW are we irresponsible? If it’s spending, then what spending? And how do you plan to fix that?

    PS. I hope these links work. I wish your blog had a preview button for comments, Jim.

  14. [Note: This is re. your followup comment, that I didn’t get until after my last post.]

    Carl, I know you’ll agree with me that anecdotes aren’t evidence, but I’ll still give you your basic point. Yes, governments sometimes do foolish things. Yes, there’s waste in government. Probably every politician in history has pledged to attack government waste (because “waste” has no constituents), but there’s still waste and there will always be waste.

    Of course, there’s waste in private businesses, too – in all organizations, in fact. And the fact that governments sometimes do foolish things doesn’t mean that they can’t do anything right. But in a democracy with hundreds of congressmen, each trying to keep constituents and campaign donors happy, there’s probably more waste than usual. (If you really want an efficient government, make me dictator. I’ll make sure there’s no waste – or, at least, that no one will dare say so publicly.)

    But part of this is because we don’t always agree on what’s irresponsible and what isn’t. Let’s look at your anecdote. What if I said that it was ridiculously wasteful to hire your friend, who pays his employees $15/hour, when our government could hire a Chinese company that pays its employees only $15/week (and doesn’t have to worry about labor laws and such)? After all, if he’s concerned about wasteful government spending, why wouldn’t he go for that?

    Heh, heh. On the other hand, maybe he wouldn’t think it fair that his tax money was going to help Chinese companies drive him out of business. I guess I could understand that. But since I’m retired, why would I care about anything but low taxes? And wouldn’t it be cheaper if our government hired nothing but Chinese labor? (Yeah, in both cases there are hidden costs, but let’s leave that for another discussion.)

    Likewise, a well-paid (probably union) worker might not want his taxes going to a company that pays its employees the lowest possible wage, with no benefits, whether it was a Chinese company or not. If it’s strictly a matter of the lowest bidder, then companies that pay the least – and who do not have a retirement plan or health care coverage – have an advantage. I might like the lower cost of such a company (ignoring the hidden costs), but someone else might object to paying taxes to destroy his own livelihood.

    And since it’s a democracy, he might get together with other workers and try to elect someone who’d support “living wage” restrictions for government contracts. His congressman might consider that an important issue, just because his constituents do (just as another congressman might see cutting taxes on the rich as more important, because that’s what his constituents – or campaign contributors – want).

    Re. your anecdote, then, I’m not saying that it’s right or wrong. I’m not saying that it’s responsible or irresponsible. I’m just saying that people can disagree about such things. It might be wasteful to you, but not to someone else, just like hiring Chinese companies for such work might make sense to some people but not to others.

    A representative democracy is always going to have such disagreements. We’ll all agree that some government spending is irresponsible, but we won’t all agree on which spending. Some people will insist that government spending go to American companies, even if it costs more, but find “living wage” rules completely irresponsible. Others will find both irresponsible – or neither.

    There’s good reason for these differences. It’s understandable that we disagree on such things. I’m sure we all agree that some government spending is irresponsible, even if we can’t agree on which. But, of course, there’s lots of government spending that is responsible, too. In general – leaving aside military spending, at least (the Iraq war was terribly irresponsible) – I don’t think that spending has been our biggest problem. It’s the continual tax cuts, especially on the very wealthiest Americans, that’s driven us into debt so deeply.

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