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Thursday, September 8, 2011

Organizing the Fiscal House

Current Fact:

We are facing a long term deficit of over $14 trillion.  One bad policy after another has led to this unsustainable amount.  Deep budget cuts and massive stimulus packages are used in Washington to prove to people that we are trying to fix the problem.  The fact of the matter is, when the deficit is $14 trillion the amount of cuts that need to happen are overwhelming.  We have a choice, put politics aside and pass responsible budget cuts paired with tax reform to stimulate the economy or make insignificant budget cuts and play political games.  The two options lead to results that are polar opposites.  Succeed or Fail.  Prosperity or Default.  These words express the severity of the issue at hand.  I think it is important to demonstrate the type of reform needed to one day achieve a fiscal surplus and a long term deficit that is sustainable.  The original figures below are based on 2010 data from the CBO on government expenditures (spending) and government revenue (taxes).  I will name each topic on both sides of the equation, and tell you the changes that were made.

Government Expenditures

Social Security: Social security reform is something that is absolutely essential for the long term prosperity of the nation.  Social Security represents 20% of federal expenditures and it is increasing each and every year.  There are more people collecting benefits than paying into the system, you don’t need to be a mathematician to realize that is a recipe for disaster.  I understand that there are many Americans that depend on social security to live, and people that plan on social security to supplement their retirement income.  That is fine, and no one will punish them for that.  My Spreadsheet includes an increase of 2.5% in social security until 2025.  My reform for social security is to cut pay outs by 50% in 2026.  This sounds bold, but the fact is people should be saving for their own retirement.  We can’t afford to support everyone once they retire.  My goal in this is to communicate to people that they have 15 years to put away enough money in which their 401k or IRA retirement savings are number one, and they use a smaller social security to supplement their main source of retirement income.  It’s more than enough time to put money away for your future.

 National Defense: Not surprisingly national defense represents 20% government expenditures.  With two wars, and an increase in staff in all branches of the government along with increases at the DoD this is expected.  This budget cut will be political.  The war in Afghanistan needs to end.  It is irresponsible to put American lives in danger, when we have no control of the situation.  The Taliban would have been defeated by now, if it wasn’t for Pakistani aid and cooperation.  Pakistan is our biggest enemy in that region, they have been misleading us and cheating us since the 1980’s.  It’s not our war anymore, we’ve done what we could and now that the truth is out about our “allies” we need to get out of there.  Anyone who may disagree should go to the Vietnam memorial in Washington and ask yourself was it all worth it?  All of the names that were lost, was this a war that was necessary?  Was the spread of communism to the region worth millions of American families loosing loved ones?  These are the questions we need to ask our selves when we put American lives at risk overseas.  With that being said, an initial cut of 30% would be initiated to represent the withdrawal of all troops in Afghanistan.  Also weak projects by the DoD would be reassessed for their effectiveness and practicability in battle. 

Discretionary Payroll:  This item represents government payroll and represents 19% of total expenditures.  Government employees make a lot of money, rightfully so considering most high paying government careers are specialized (i.e. lawyers, engineers, and accountants).  We want talented individuals working in government, but this amount isn’t sustainable.  The idea of outsourcing certain government tasks to private sector businesses should be on the table.  This paired with a 20% cut in salaries could be very effective.  We wouldn’t leave these workers out to dry, they would receive tax breaks and be tax exempt on certain payroll items to make up for the significant loss in gross earnings.  This would most likely be one of the more difficult items to get support for, but ideally government employees would leave and work for the private sector.  The goal is to reduce the size of government payroll, whether it is through salary cuts or personal changes.

Medicare & Medicaid: Healthcare reform is no easy topic.  That’s why it has never been done effectively.  There are two many variables involved and a potential disaster due to faulty policy is absolutely a possibility.  The goal of this reform is to have a balance between affordable insurance premiums without stifling medical and pharmaceutical research and development.  The reform is still in question, but Medicare and Medicaid represents 23% of the yearly budget and it needs to be cut.  A significant amount of research needs to be done to make healthcare more efficient, and government audits would be done to asses the legitimacy of the high price tag for insurance.  In many circles, this would be considered too much government influence but it needs to be done.  There are too many people at stake to allow everyone to be subjected to false fluctuations in premiums.  The way effective reform can happen in this case is to separate Healthcare companies and Pharmaceutical companies.  Make them file separate financial statements and if they operate under the same name allow them to filter money back and forth, but there needs to be more transparency in what is we are actually paying for.  This idea isn’t perfect, or even very refined but I believe it is a starting point for effective change in the system.

Other Mandatory: Pension obligations that need to be upheld, regardless of the need for deficit reduction.  This represents 12% of expenditures.

Decrease in Unemployment Benefits Paid: This is more of an after the fact adjustment.  But as you will see, I believe that cutting corporate tax rates will create an incentive for companies to hire again.  More discretionary income, means more growth, more growth means more jobs.  My goal is for unemployment to reach 4% .  If this were to happen we would have more people paying into the system and more importantly, not collecting unemployment benefits.  If we were to decrease unemployment to 4% you would see an annual decrease of roughly $85 billion paid out to people. 

Net Interest: This is a function of the amount of treasuries are outstanding, the amount paid will fluctuate based on the increase and decrease of treasury securities.  It represents 6% of the budget and all we can hope is that we don’t need to continue to issue ridiculous amount of treasuries to fund the government.

Tax Revenues

All tax revenue reform is based on one idea.  Cutting corporate tax rates will stimulate the economy. We have seen that large stimulus packages don’t work.  They don’t work because they are myopic.  The federal government is big, but it isn’t big enough to understand where to effectively spend money to add jobs to the economy.  More importantly, even if the stimulus adds job in the short term there will be no jobs in the long term.  That is the issue with claiming that infrastructure spending will add enough jobs to get the economy back on track.  That means you have to spend more to add jobs.  We just can’t do that, what we can do is adjust the way we collect tax revenues to allow growth to happen.  My idea is to adjust corporate tax rates from 35% to 15% across the board.  This will give corporations and small businesses 10% more of their net income to put back into the business.  This is what is needed!  The government needs to give money to the private sector, but not in the form of stimulus or subsidies.  It needs to be done through tax cuts. 

I believe that once these cuts are done, you will see an initial spike in private sector hiring and consistent trend of long term private sector growth.  Giving corporations a reason to grow within our borders is absolutely necessary to the prosperity of the nation.  You would think that since we are cutting taxes that tax revenues would decrease, but that isn’t the case.  Assuming that corporations use their newfound discretionary income to hire new employees, you will actually see an increase in tax revenues because of more individuals paying into the system.  Also with pro business reform you can expect to see a consistent increase in GDP growth from year to year.  This means an increase in wealth for the nation, and raising the taxable base for everyone.  From a percentage POV, taxes will remain the same for individuals, but from a dollar amount taxes will decrease.  This isn’t terrible because you will be making more money every year because of the healthier economy.

End Result

The end result of my analysis is that the budget would be balanced by 2021 and the long term budget surplus will be $7 trillion by 2040.  I understand this isn’t the most in depth analysis, but the ideas are sound and the need for deep cuts is unprecedented.  Decreasing the size of government is very important in the future, we need to add a renewed sense of focus on key items for the federal government.  It will add efficiency to the system, and allow for tasks to be delegated more effectively to the states.  More importantly though, we need to get the countries fiscal situation under hand before we move forward with any kind of giant federal spending bill.  Universal healthcare can be brought up in conversation when we are fiscally sound.  If an average person wanted to buy a BMW when they can’t afford a loaf of bread you would think they are crazy.  That is essentially what is going on in Washington right now.  One step before the next and the first step is getting our fiscal house in order.  The way we do that is through tax cuts, not stimulus packages.  If there is anything you take away from this, please remember that.

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