Saturday, December 18, 2010

It's Not Just The Spending, And Don't Call Me Stupid

A conservative mantra regarding the Federal budget deficit has been "It's the spending, stupid." Since Congress recently passed an extension of the current income tax rates and adjusted estate tax rates along with a one-year payroll tax reduction and increased unemployment spending, I think it would be a good time to look at this line of thinking.

I like to equate a federal deficit or surplus to weight gain or loss for an individual. Our federal deficit is a problem similar to obesity. When a person gains weight, they eat more calories than they burn. The excess calories become body fat. When an entity runs a deficit, it spends more money than it takes in. The excess spending becomes deficit. These are simple mathematical formulas that a logical person really cannot argue. Unfortunately, many do. How many ads have you seen that promise weight loss without diet (calorie intake reduction) or exercise (calorie burning increase)? Likewise, how many columns by the likes of Paul Krugman call for increased spending as a solution to economic problems?

The fact is the federal government is on the Chris Farley diet. It won't stop gorging itself (and, like Farley, often poops in inappropriate places). The 2010 budget calls for $3.55 trillion in spending, with only $2.38 trillion in reciepts. The deficit of $1.17 trillion means that 30% of every dollar the government spends must be borrowed.

Conservatives scream, "cut spending," and they are right. However, to balance the budget, something that was done as recently as the late 1990's, we would need to cut 30% of all spending. Over $2 trillion in spending is related to Social Security, Medicare, Medicaid, other Federal Entitlement programs and interest on the national debt. The American people have shown no will to cut back on these and if conservatives think they were mandated with eliminating the New Deal, I would suggest that they will be in for a rude awakening at the ballot box upon trying. The remaining $1.5 trillion in spending includes some worthy outlays including national defense at over $663 billion. The spending detailed above already puts America in a deficit position, even if spending were to be eliminated on the federal departments of Health & Human Services, Energy, Education, HUD, Homeland Security, Justice, Veterans Affairs, Commerce, Treasury, Labor, Interior, Transportation, State, and Agriculture. Clearly, no one would argue that 100% of the spending from these categories are unnecessary.

Sadly, 2010's budget doesn't even include the cost of Obamacare. Things will get worse, as that adds hundreds of billions of dollars to future deficits. Additionally, rising interest rates are certain to drive interest cost on the debt up from the current annual level of $164 billion. So how do we solve our debt problem? The first rule of holes is that when you are in one, stop digging. Obamacare and all new spending programs should be repealed.

Next, we need to give credit where it is due. President Obama's commission on Federal Debt came up with some good recommendations, including cutting initial benefits for Social Security recipients, and raising the eligibility age. Conservatives should continue to pursue their goal of eliminating many of the wasteful federal departments, such as Energy, Agriculture, HHS, HUD and others. In a world where we can't even defund the National Endowment for the Arts, this will be difficult.

Finally, we need tax reform. Democrats are correct that there is a group of Americans that doesn't pay their fair share of taxes. This group is essentially stealing from their fellow Americans. Of course, I'm talking about the 40-50% of Americans that pay no federal income tax. This group includes the poor and many middle class Americans. Sunsetting the Bush tax cuts would appropriately put millions of Americans back on the tax roles. I'd prefer this in the context of an overall tax reform package that eliminates all tax deductions, including the home mortgage interest deduction and child credits. In return for raising taxes on the people who haven't paid their fair share, I'd send the tax rate on millionaires up to the level that they were during the Clinton era.

If you made it this far, you're probably cursing me out. That's because everyone has benefitted from the Federal deficit. It's fun eating whatever you want, and exercize is painful. However, remember the lesson of Chris Farley. If you never take care of yourself, bad things will happen.