Cries to balance the Federal budget from all sources have been heard for decades, even centuries. Seldom has the U.S. budget ever been balanced for any given year. It is almost constantly in deficit. Yet, after all this time, the sky hasn’t fallen so to speak. Why? If you think of your own budget, when you buy a large capital expenditure – a house, car, even furniture, most of us don’t pay for it entirely the year we buy it. So why, when the Federal government buys buildings, ships, airplanes, trucks, tanks, etc. that will last in most cases decades, should we expect those budget items paid off in the year bought?
Now, things that are consumed in the year bought (e.g. government employee wages, unemployment checks, food stamps, etc) should be paid in the year consumed. Therefore, just as is common for a person or family to take out a mortgage or loan for capital items and pay them off as we use them constricted by loan size to income, perhaps the same should be considered for government. Government annual income even in a good economic year is less than $3 trillion. Ideally, it's maximum debt limit should be $4.5 trillion and certainly no more than $6 trillion or double annual income. Same principles that a responsible bank would normally follow on a long term mortgage loan for you or me.
Given that government debt exeeds $14 trillion, the U.S. budget is already in very big trouble now! I think the debate about government deficits would be better understood and accurate if compared in this manner. So now that we know that we are in big trouble, how do we fix the problem?
First, a change in government accounting practices and attitudes needs to occur. We should separate immediate type expenses from long term investments. Immediate expenses must be paid in the year consumed (for example food stamps, medical expenses, government salaries and pension payments, etc.). No borrowing permitted. For the rest, ‘pay off’ those long term investments such as new government buildings, ships, planes, etc. (as if they were actual loans with set payment terms such as interest rate and length of loan) by assigning the required amount of tax revenues from the current year toward that ‘loan’ so that it would become clear whether or not we are still paying for investments bought in prior tax years that should have been paid off by now (and/or defaulting on our previous ‘loans’). Those are the situations that should cause us concern.
Next, we start with actual government revenues of less than 3 trillion dollars a year. We first budget enough money to pay principal and interest of our $14 trillion dollar plus debt off in 30 years. What's left is the maximum we can spend in any given fiscal year. All the short term and long term spending programs must be shrunk to fit that annual dollar limit.
How can we possibly do that? Let me first ask you this - if you earned $21,000 a year, spent $36,000 a year and had a debt of $145,000 or six times earnings, what would you do? You'd pick your priorities and cut back or a bank would do it for you probably evicting you from your home. Now add 8 zeros to each of those numbers, and you now have the current finances for the federal government. Now for the solution:
1. Go back to the 2006 budget for a start cut spending on each government program to those levels. It wasn't that long ago, so it shouldn't be that hard. That cuts about a trillion dollars a year in spending. I'm sure, a reduction in government employees to the number we had back then or less would be necessary.
2. Government subsidies for all sorts of reasons (agriculture, rural electricity, ethanol, green technologies, hiring police and firemen that local governments should be paying, etc.) total one trillion dollars a year. Cut all of them to zero. In some cases like agriculture, it may be prudent to cut back incrementally over a five year period to give farmers time to adjust without going bankrupt if it occurred too fast.
3. Cut the number of government workers by 20%, bring salaries and benefits in line with the private sector. Get rid of the IRS by applying taxes against paychecks with no deductibles, just like Social Security. No taxes on interest, dividends, or capital gains; therefore no forms to fill out plus a great effective way to boost capital investment and job growth which will increase collected govermnment tax revenues.
4. Turn over Medicare collections (but not necessarily Medicare itself) to insurance companies. Insurance fraud is 25% for government Medicare and less than 1% for inurance companies. That will save hundreds of billions in spending over a 10 year period.
5. Social Security - continue to buy Treasury Bonds with government gauranteed interest rates, but insteazd of using that money on government spending with no investment return, buy mutual funds, ETFs, bonds so that income does come back and can therefore pay off SS liabilities and probably with extra revenues to reduce debt and increase benefits going forward. So we have not privatized SS since we still have government gauranteed Treasury bonds. Even if the investments go down in value, that would still be more money to retire maturing bonds than zero which is what we have coming back today from past Treasury bonds that are forcing us to re-borrow. Put control of this investment program into several investment firms. The government is totally unqualified to manage it. No political investment goals allowed (e.g. no to mandated green energy investments). The only goal is to make conservative investments with long term high return potential. Also, include direct, illiquid investments that pay income and are not subject to stock market swings. Most people are unaware of these, but not the wealthy who manage to stay wealthy in every economic climate. They exist in energy drilling and mineral rights, real estate, equipment leasing, and a lot of other areas. Those investments can't be sold on the stock market.
6. Defense - it is a disgrace that we just passed a huge Defense budget for 2012 with a double digit increase. We spend more on defense than the next 20 nations combined. We have hundreds of unneeded military bases that need to be closed, but are kept open as "job makers" for political districts and states. We need to cut the Defense budget by one third and that will still leave us very strong.
Getting it Right - Welcome
The goal of this blog is to publish my thoughts on a variety of economic and political topics in the hopes that people who find them educational or beneficial will utilize them and/or forward to others who might find them interesting and/or worthwhile to promote to others, possibly including politicians who can push some of these ideas to fruition. The topics in my blog are meant to be of value on a long term basis, not a daily diary or political issue of the day log. If the information posted is useful to you, by all means utilize it and/or forward it as you see fit. If not useful, then merely ignore it. There are no universally agreed upon truisms and too little tolerance between some of those with opposing viewpoints to successfully convince the people with hardened opinions to move away from them. I am an analytical type person who will try to be as factual as I am able.
I disdain the current popularity of name calling and condemnation of viewpoints with no factual alternatives or logical solutions given that I see so often. If you don't have a solution based on fact and logic, then opt out of the discussion because you have nothing to contribute. My background is a degree in Economics from the University of Michigan and 39 years working in middle management jobs for a major retailer. My opinions are forged on the personal experence of life, family, friends, and work as well as triumphs and mistakes that I have made and hopefully learned from. My hope is that this blog helps you.
My first topic will be about personal finance. I chose that one first because most of us work long and hard just to survive but not all of us realize our dreams of becoming financially independent from the labors of our work. Much of our political votes/thinking also focus on the economy and in particular how well we are personally doing financially.
It is relatively simple, without sacrificing the enjoyment of living for 'today' and even at moderate incomes, to retire as a millionaire or multi-millionaire, if you focus on that goal consistently from a young age. It is also simple to ensure that your child or grandchild retires rich. It merely requires a one time gift of just $2,000 invested wisely and the passage of time. Please read my first post on this blog to learn more.
An index/schedule of past and future posts and their dates will always be updated so that it becomes the first post that you see below. If the date of a post that you wish to read is preceded by the word "Posted", then find it below or click on the title in the Blog archive to review.
