Slashing the Budget – Maybe

“Bureaucracy is a giant mechanism operated by pygmies” – Honore de Balzac

With the massive Republican wins in the House of Representatives this election, and the 2012 presidential primaries starting up, the rhetoric on budget deficits, tax rates, and spending cuts is starting to take the lead in the news cycle. Naturally I have a few things to say.

First, let me make the note that we do not actually have a budget for the 2011 fiscal year. The Democrats in Congress were unwilling to put out a budget that either had massive deficits, massive spending cuts, or required massive tax increases – so they just didn’t pass a budget before the election. However, the CBO estimates that the deficit for 2011 will be around $1.6 trillion. (Obviously those numbers can be disputed – since there IS NO BUDGET.)

This is $1.6 trillion from a budget that, if things stay the same, will be around $3.8 trillion. Oh my. That means we estimate that we’ll get roughly $2.2 trillion in revenue, and spend that plus an additional $1.6 trillion. The $1.6 trillion is 73% of the $2.2 trillion. That is a LOT. Imagine if you ran a 73% deficit every month. How long would it take to be broke? (not long.)

So, the budget hawks are out, and everybody will have to play along because it is political suicide to defend a 73% budget deficit.

Now, before hitting on the news stories, let me note that you cannot allow for ANY sacred cows when you have that much of a deficit to close. Everything is on the blocks, and quite frankly everything will have to take a hit. I’ll give you my preferences in a moment, but let’s look at what is being said by people with a bit more clout first.

Recently, President Obama put together a commission to help reduce the budget deficit. (Great, another commission.) They proposed some interesting ideas: Raise the gas tax, cut defense spending, cut farm subsidies, tighten down on medical malpractice suits, and raise Social Security retirement age to 68 (in 2050!) and 69 (in 2075!). Sorry guys, that’s not even close to enough. The plan will reduce the deficit from the current levels all the way down to $400 billion by 2015.

Immediately you see the fallacy of the approach. President Obama has been pushing to get deficits down to 3% of GDP. How is it a good thing for a person already in massive debt to only dig the whole deeper at a slower rate? This will not get us anywhere. We need to run a surplus, maybe 3% of GDP – or maybe 5% of GDP.

There are also calls for ending some tax breaks, most notably the mortgage-interest deduction. Naturally this is causing some howls. Realtors are pissed, bankers are pissed, and homeowners (with mortgages) are pissed. OK guys, it’s time to be adults. We cannot cut close a 73% hole in the budget while making sure that everybody gets everything they always have had. We ALL will take a hit on this. And if we don’t agree to all take a hit, the system will collapse and we’ll all take a hit anyway. I say let’s man up and take the hit of our own choosing. On that note though, I’m willing to give up my mortgage interest – but I want the rest of America to share the burden too … but let me not get ahead of myself.

As the rhetoric continues to amp up, and I think it should, let me make a few notes of my own. First, you cannot close a $1.6 trillion deficit on the margins. It will take massive structural changes. Second, it has long been known that tax increases hurt the economy, making them an ineffective long-term solution for anything. (I think we should be arguing about tax cuts right now, and even bigger spending cuts.)

So, what would I do? First, from a taxation standpoint, I prefer a flat tax, no deductions, no exemptions. Sure, take away all of the mortgage interest deductions, and take away my charitable donation deductions too – but take away the offensive, communist manifesto progressive tax while you’re at it. I’d bet dollars to doughnuts we’d see revenue growth. Fairness seems to just work out that way.

Of course, spending will need to be cut too. So, I’ll offer some solutions. First, I think that the most oppressive, evil, immoral, and reprehensible federal spending programs are the ones that take money from the producers (that’s me, by the way) and give it to non-producers for their own personal benefit. I don’t care if that personal benefit is a moral one or not, it is well outside the government’s rightful role and purpose to make such judgments about what charitable things I ought to do with my money. So, I say we close the budget deficit tomorrow by disbanding all federal funding for Welfare, Medicare, Medicaid, and Social Security. Rip the bandaid off. End ‘em all.

OK, that probably won’t fly. So what else could we do? Well, to be equitable, why don’t we just cut everything in half. Defense budget, cut from $685 billion to $343 billion (out of benevolence I rounded up). Let the DoD decide how to spend it. If that means we have to pull out of Iraq and Afghanistan, so be it. I don’t like the idea personally, but we are throwing away any future our kids hoped to have (and I have three kids) with these deficits. Why save the world when there won’t be anything left of our country? Of course just exiting Iraq and Afghanistan wouldn’t do the trick, we’d probably have to cancel some programs (like F-22 and F-35). But, they could figure that out for themselves. You never know, such a pressure might cause the DoD to actually clamp down on waste.

Same 50% cut for Social Security. I don’t really care how it’s implemented. Do you want to raise the retirement age now? Fine. Do you want to just cut everybody’s check in half? Fine. Want to put a means test on and refuse checks for those with net-worths over $500,000? Fine. Make the 50% cut though.

(Now, I personally think we could just cut the Department of Education by 100%. But that’s for another post.)

So, 50% too harsh? Well, let’s consider something else then. I pulled the chart below from the Heritage Foundation.

What I find most impressive about this chart is how the red line (revenues) has been trending up with the blue line (spending) – until the recent crash that is.  Maybe the blue line is 5 years ahead or so. That means if these geniuses in Congress had ever made the tough decision to simply freeze spending for 5 years, they could’ve balanced the budget. That’s it. No cuts necessary, just take you’re foot of the gas. Well, we’re beyond that point now.

So how do we get to 50%? Well, if a 50% overnight cut is too harsh, why don’t we make a 7% overnight cut. Cut every single line item in the budget by 7% (except for earmarks – those have to be cut by 100% and never come back). I’d bet the DoD could figure out how to manage a 7% cut – maybe Social Security and Medicare could do the same. I mean, 7% is just austerity, or belt-tightening – it’s not armageddon. Now, if they could to a 7% cut this year, maybe they could do one next year too. If we just did a 7% cut every year we’d be to 50% in 10 years. Yes, 10 straight 7% cuts would be hard to pull off – but it’s at least conceptually viable – people can see it possibly working. And besides, you never know what might happen. We might find after 5 years of 7% cuts (30% total budget cut) that revenues have caught up and we can just hold steady.

So, long-story, well, not that short: we cannot close this hole with marginal cuts. It will take structural changes. If you think an economic boom is around the corner to bring us out, I’d say think again. We need to take the difficult, decisive action now to save the future. There are no sacred cows in this fight – everything will have to get dinged.

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