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L. Neil Smith's
THE LIBERTARIAN ENTERPRISE
Number 619, May 15, 2011

"They all went to the theater expecting
to see a film, and saw a movie, instead"


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Balancing The Federal Budget: A Simple Proposal
by C. Jeffery Small
jeff@go-galt.org

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Special to The Libertarian Enterprise

Take a look at the following chart:

See any possible problems there? From 1940 and for thirty years thereafter, although the the national debt was increasing, it did so at a fairly slow rate. However, by the 1970s the rate of increase starts to accelerate as indicated by the steepening curve, until the rate begins to go asymptotic around 2007, indicating that the the factors controlling the debt have gotten completely out of control.

Now, examing the annual level of federal spending in constant, inflation-adjusted dollars.

Here we see a fairly constant year-after-year increase in federal spending, indicating the steady growth in the overall size of government. Let's break this down by decade.

Decade

Average Annual Spending
in Constant 2005 Dollars
(Billions)

Spending Increase
From Previous Decade
(Percent)

Ratio of 2011
Govmt. Spending
to Decade Average

1940s

$502.4

7.6x

1950s

$569.7

13.4%

6.7x

1960s

$788.4

38.4%

4.8x

1970s

$1,115.2

41.5%

3.4x

1980s

$1,549.9

40.0%

2.5x

1990s

$1,893.1

22.1%

2.0x

2000s*

$2,597.6

37.2%

1.5x

 *12 year average: 2000-2011

Even if we assume that the 2011 expenditures is an anomaly and consider decade averages only, these figures show that government size in the 2000s is over five times larger than it was during the 1940s. And if we average the expenditures for the thirty year period from 1940-1969, our current federal government has still increased more than four times over that historical level.

Now, let's take a look at the revenue side of the picture.

As with expenditures, we observe a steady increase in revenue, every penny of which comes from American citizens, either directly or indirectly. Breaking this data down by decade reveals the following:

Decade

Average Annual Revenues
in Constant 2005 Dollars
(Billions)

Revenue Increase
From Previous Decade
(Percent)

Ratio of 2011
Govmt. Revenue
to Decade Average

1940s

$313.2

6.9x

1950s

$556.5

77.7%

3.9x

1960s

$754.2

35.5%

2.9x

1970s

$999.3

32.5%

2.2x

1980s

$1,275.9

27.7%

1.7x

1990s

$1,711.3

34.1%

1.3x

2000s*

$2,139.4

25.0%

1.0x

* 12 year average: 2000-2011

Note the steady and very substantial decade-after-decade increase in the amount of wealth extracted from productive individuals and businesses. Examining just the period from 2000-2011, the total revenue (in 2005 dollars) was $25.7 trillion. If government spending had been held to the 1980s average of $1.55 trillion/year for a total expenditure of $18.6 trillion over the same 12 year period, then there would have been a net surplus of $7.1 trillion, which would have allowed for the complete elimination of the $5.6 trillion debt that existed in 2000, with a $1.5 trillion cushion remaining.

Stop and think about that. With a steadily increasing revenue stream that not only could meet all existing expenses, but would have allowed the entire national debt to be retired in just over a decade, what happened? And how instead, did the debt almost triple in such a short period of time?

This chart tells the story:

The national debt continues to rise, because, no matter how much revenue is at their disposal, and no matter how significantly it increases, the Congress and the President work diligently to spend every available nickel, and then go into debt in order to spend even more — lots more! As this chart shows, the government has run a deficit 28 out of the last 32 years, or 88% of the time. And a review of the historical data reveals that since 1940, there have been deficits 60 out of the past 72 years!

During that 72 year period, while both the Republican and the Democratic parties have held the presidency in equal measure (36 years each), together, they have managed to balance the budget less than 17% of the time (five times under Republicans and seven times under Democrats). And of those 12 budget surpluses, only six were used to slightly reduce the debt, the last time being 42 years ago in 1969. During the past seven decades, the current $14.3 trillion debt has been ratcheted back by just $25.5 billion, or less than 0.2% of the current total!

For 2011, our $3.82 trillion budget includes an estimated $1.65 trillion deficit, which pushes total federal debt well beyond the current $14.3 trillion spending cap. At currently projected spending levels, the debt is estimated to be rapidly approaching $20 trillion by 2015.

In 2010 alone, the United States paid $414 billion simply to finance the debt burden. And since 2000, interest payments exceed $4.4 trillion. That is money that has been removed from productive use by individuals and businesses in the U.S. economy and sent primarily to foreign creditors, including: China, Japan, UK, Brazil, Taiwan, Russia, and so on.

While a number of intellectuals in the political and financial spheres have, for many years, been sounding alarm bells about the pending disaster being created by a ballooning debt, rising interest payments, and the unfunded liabilities resulting from Social Security, Medicare and Medicaid, it wasn't until early in 2009 that a large segment of the general public awoke to the imminent economic danger presented by unsustainable government expansion, coupled with the the rise of a totalitarian political class, leveraging America's cultural shift away from self-reliance and personal responsibility and towards a helpless entitlement mentality. The rise of the Tea Party movement was the political response to these new realizations.

In the 2010 elections, the clear message sent was that past political behavior was no longer going to be tolerated by the public. The budget was to be balanced, the debt paid down, earmarks eliminated, taxes reduced, federal spending slashed, and the size and regulatory burden of government was to be significantly decreased. In general, Democrats ignored this outcry and were resoundingly defeated by Republicans who at least paid lip service to these demands. However, after returning to D.C. following the elections, the overall performance by the new congressional members has been extremely disappointing. Republicans who once spoke of slashing spending, balancing the budget, repealing Obamacare, significantly reducing the size of government, and returning to a rule of law in strictly proscribed areas, as dictated by the Constitution, have failed to even take a firm stand on these issues, let alone deliver meaningful results on their promises.

For example, prior to the 2011 budget negotiations, Republicans promised a rather anemic $100 billion (2.6%) reduction against Obama's huge $3.82 trillion budget and $1.65 trillion deficit. However, by the time the budget was finalized in April, they had capitulated to a mere $38.5 billion (1%) reduction, which then turned out to actually be a true savings of only $352 million (0.01%), leaving the Democrats laughing all the way to the printing presses.

Or consider Paul Ryan's much touted "Path to Prosperity", which the Republicans offer as their alternative for addressing entitlement liabilities while cutting spending by $6.2 trillion over the next 10 years. Well that sounds pretty good until you look a bit closer. Did you think that current spending levels were going to be reduced by $6.2 trillion? Well fuggedaboutit. This is just the Republicans using the standard political trick of misdirection, as the following chart reveals:

Ryan's plan has no intention of balancing the budget in the foreseeable future. He has government spending increasing year by year, just not quite as fast as Obama's own proposal. His $6.2 trillion is not a real savings, but just some imaginary gap between his fantasy projection for the future and that of the current administration, both of which are unrealistic because, as with almost every past budget, they significantly overestimate future revenue while underestimating future outlays, giving us an 88% change of continuing deficits and an ever growing debt.

It is all a form of political theater and wish fulfillment that runs through every thread of government, best illustrated by the recently released Changes in CBO's Baseline Projections Since January 2001, which reports:

Each year, the Congressional Budget Office (CBO) issues baseline projections of federal spending and revenues for the following 10 years. Those projections are not intended as a forecast of future outcomes; rather, they are estimates of spending and revenues under the laws that are in effect at that time and are designed to provide a benchmark against which to measure future policy changes.

In January 2001, CBO's baseline projections showed a cumulative surplus of $5.6 trillion for the 2002-2011 period. The actual results have differed from those projections because of subsequent policy changes, economic developments that differed from CBO's forecast, and other factors. As a result, the federal government actually ran deficits from 2002 through 2010 and will incur a deficit in 2011 as well. The cumulative deficit over the 10-year period will amount to $6.2 trillion, CBO estimates—a swing of $11.8 trillion from the January 2001 projections.

How many times do you think the CBO has been off $11.8 trillion dollars in the other direction?

My simple (and unrealistic) proposal:

Having observer the new Congress unsuccessfully tackle issues such as the 2011 budget, it seems clear that, as things stand, nothing of real substance can be expected to be accomplished. So long as Congress retains the ability to both set the level of spending as well as determine where that spending is to be allocated, there remains little hope that they will ever exercise any real fiscal restraint and make the difficult choices that are required. And we taxpayers are the ones left on the hook for the tab they continue to accumulate.

The unrealistic part of my proposal — something that would require a change to the Constitution — is that the ability to set the overall annual spending level must be removed from the hands of government completely. In the long run, there are a number of ways that these levels could be determined, but I believe that the best would be to simply establish some very reasonable but fixed dollar amount that would be the sum total available for all normal government operations, with a provision for automatic adjustment to account for inflation/deflation. This would then be coupled with a balanced budget amendment that would require that the government maintain its spending strictly within this limit. Emergency situations such as declared wars, would be precisely defined, and funding for these activities would be handled by other means, but the overall size and nominal cost of government functions would be strictly proscribed and fully understood by all citizens.

Given a known annual budget, it would then be up to Congress to determine how to allocate these dollars. They could fund government payroll, pensions and insurance. They would be responsible for facility rent, new construction and maintenance. They would apportion funds between agencies such as the CIA, FBI, the Armed Services and others. They could fund entitlement programs, or promote initiatives like cash-for-clunkers or home window replacement for energy conservation. They could send aid to foreign countries, support the UN or invest in promising new technologies. Money could be spent on pure research or used to build and launch rockets. Some funds might go to help the poor obtain health insurance or purchase prescription drugs, while others could be used to build bridges to nowhere or monuments to past presidents or fight the "war" on drugs. The sky's the limit. The only condition would be that should they wish to allocate some funds to one area, for example, to set up a presidential cell phone emergency alert system, then these dollars would have to come from or at the expense of something else. Citizens would elect representatives that promised to promote things of agreed importance, and then it would be up to those representatives to work with other congressional member to devise the best allocation strategy — just an families and businesses routinely do every day as a matter of course. One huge consequence of this approach is that it would very quickly be determined what the real priorities were for all of the possible expenditures. It would soon become evident how entitlements for the needy weighed in relation to immigration reform, illegal drug use, energy policy, and so on.

To implement this plan would also require addressing the problem of getting from here to there. Right now our deficit is $1.65 trillion in relation to a budget of $3.82 trillion, making the deficit a whopping 43% of the total! My proposal would be to immediately start cutting the existing budget across the board by 10%, or $382 billion for each of the next five years: 2012-2016. By declaring that these cuts apply equally to all areas of government — from the military to entitlement programs to salaries to regulatory agencies — it eliminates the grid lock we currently see where each party jockeys to fund their pet programs while defunding those of the opposition. Since they are unable to do it themselves, we will make all of the hard decisions for them.

This would reduce the 2016 budget down to $1.9 trillion, or about the same level of spending as in 1989 (in equivalent dollars), while fully eliminating the deficit and yielding a small surplus. From 2017 onward, continue to reduce the budget by 5% each year, applying all surplus to retiring the outstanding debt. Maintain this process until the desired spending target level is reached and then freeze it. Once the deficit is eliminated, begin reducing or restructuring taxes to produce an ongoing revenue with a slight surplus, which is banked strictly for use against future revenue short falls and nothing else. As the budget reductions went into effect, it would be left to Congress to start reallocating the remaining funds to support areas of greater importance while defunding those of less utility. This would require that every aspect of current government operation be brought up for discussion and a detailed review, a process which, as previously discussed, does wonders to focus the mind on one's priorities.

If something along these lines is not enacted, and if we simply continue along our present course, spending our way into oblivion while maintaining a regulatory environment that is crippling the economy with uncertainty, then it will not be too long before the U.S. reached it's own tipping point, and then, like Greece, Portugal, Ireland and others, we will no longer possess the ability to recover on our own. And no one is waiting in the wings to bail us out.

A few brave Tea Party-backed candidates have made it to Washington with the resolve to fight the system and work to effect real change. However, there are as yet too few of them to wield real clout. Over the course of the next few election cycles, I believe that there is an opportunity to replace many more of these liberal Democrats and RINOs (Republicans In Name Only) with true fiscal conservatives who could work together to accomplish the goals that have been promised, but which are being evaded by the current Congress. Let us hope that they arrive in time, and when they do, that they will be prepared to take bold action, similar to what I outline here, allowing the necessary corrections to occur as quickly as possible, so that our economy can begin to expand and thrive, once again, assuming its rightful leadership position in the world.


First published in Mr. Small's Small Thoughts for a Complex World 'blog on March 14, 2011.


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