How we balance the budget in 4 years

By Tom Flake

I announced about a month ago on Brutally Honest that I was running for President on Votocracy and I could still use your support. But before deciding on whether to support me, I think you need to know how I would propose fixing the various problems that currently face America.

One of the next President's most pressing problems will be to balance the budget.  There are several reasons for this, but I think the ethical/moral imperative is the most salient.  A country chooses to run a deficit when it cannot or will not pay its bills with current money, but instead chooses to pay for current expenditures using future tax collections.  Another way of stating this is that current generations pay their bills with future generations money. 

In my mind this is defensible under two, and only two situations:

1) A war or similar calamity that not only threatens the existence of current generations, it therefore threatens future generations.  It is clear that these future generations have a stake in being born, therefore under certain circumstances (Such as WWII) borrowing the money (running a deficit) to survive is defensible. 

2) When investing in long term infrastructure such as the national highway system or the hyrdo-electric dams built during the Great Depression (Grand Cooley, Hoover, etc)  It is obvious that current generations benefit (creation of jobs, new sources of power and improved economic efficiency) but since these assets last for generations, it is defensible that future generations who will realize some of the benefit should shoulder some of the burden.

There are other circumstances where it is morally indefensible to run a deficit, situations where there is no clear benefit to future generations, but where borrowing the money will cause a burden on those generations:

a) Wars of convenience - Libya, Syria, and to a lesser and perhaps questionable degree, Iraq

b) Funding current operations

c) Buying votes

d) Using tax incentives as operant conditioning to modify taxpayer behavior

Once a nation has made the decision to spend more money than current revenue will provide, it has four options:

1) Raise taxes on the current tax base - Raising taxes will ultimately result in less investment and less economic activity due to fewer incentives netting to the individual who performs the work.

2) Borrow the money from lenders - In borrowing money, the country is then required to pay interest for the use of the money, which in future years gets diverted from then current expenditures.

3) Print more money - Printing more money (inflation) is the cowardly strategy that we have been following for some time.  It give politicians the ability to say that they haven't cut benefits, but to pay those benefits with ever less valuable dollars.  While the face value of benefits doesn't change, the purchasing power does.

4) Grow the current tax base - The only strategy that doesn't have negative repercussions is a strategy of growing the tax base, a strategy that has the advantage of not de-incentivizing the productive members of society, not incurring interest expenses in future periods and not decreasing the purchasing power of the dollar.

So, there is a moral imperative to balance the budget and the most attractive way to do that is to grow the tax base. 

Easier said than done perhaps, but here’s my plan to achieve that goal and in what order things must be done:

I) Set a goal - I believe that if we are able to lift GDP growth in the United States to 6% per year for 8 years, we will usher in the greatest post war growth period in U.S. history AND will largely solve problems with Social Security, Medicare (with the exception of Part D) and some of the overall Federal Deficit.  This is to be accomplished primarily by "re-domesticating" America's energy industry (more detail on that in a minute).  Under normal circumstance this might not be possible, but with (by the time of the election) four years of zero to negative growth,  my goal growth rate will simply return us to long term trend of 4%.

II) Identify obstacles and put in place mitigating strategies - Americans do not have (across the board) jobs skills that are marketable - (Note unemployment among people with graduate degrees is approximately 4% as of this writing, they are not experiencing a recession.  At the same time, unemployment among the young and minorities without college degrees, much less graduate degrees, varies and is up to 25% depending on the demographic you look at).  Ensure that all Americans have access to training that gives them sellable skills in a market.  Those skills may need to be world class in an environment that allows some jobs to move around quite easily (engineering, radiology, help desk) .  Or they may only need to be "good enough" to compete in their local market for jobs (nursing, plumbing, carpentry and other services) that require a physical presence)

A) Pell Grants and Stafford loans must be changed to incentivize training skills that are marketable.

B) In the last generation, we have grown too many of the "overly educated unemployable".  There are jobs available.  Check out Hotjobs or Monster.  Amazon, Apple, Kellogg's, none of them can find enough people in the right place with the right skill set.  Plumbers and electricians can find work that pays well but the "sexiness" of the trades has faded in recent years.  We need to return to a work ethic that says, "All work which allows people dignity and provides sufficient to raise a family, that can be done morally and ethically is work that anyone should be proud to do".

III) Identify concrete steps to realize your goal - Those who read my 8 Step Plan to Reduce Unemployment will recognize most of these steps.  This isn't an accident.  Because the strategy of balancing the budget is largely based on growing the tax base, the strategies to lower unemployment coincide.

IV) Implement the steps to realizing the goal and to mitigating the obstacles.

What's the plan?

1) Grow the economy to increase tax revenue to the government:

A) Mandate that all government regulatory bodies freeze new regulation and reduce existing regulation by 25% before writing any new rules. They have 90 days to comply.

B) A sane national energy policy. Over five years, phase out the import of oil or petroleum products from outside the Western hemisphere. At five years make it illegal to import oil or petroleum products from outside the western hemisphere and to export oil or gas from the U.S. or its territories. Mandate duel fuel cars that run on both liquid natural gas and traditional gasoline. Mandate an increase in domestic drilling. Subsidize the construction of a national pipeline infrastructure with two goals: 1)Move LNG to market 2) move petroleum from the Green River Formation and Tar Sands in Canada to market. The massive changes in infrastructure (construction of pipelines, and construction of LNG distribution infrastructure) will result in significant job creation. We currently export about $25 Billion to purchase our energy abroad every MONTH.  By brining the energy industry home we grow the domestic energy industry and bring those jobs (and many of them are high paying jobs) back from overseas.  This is like a $300 Trillion stimulus to the economy every year, forever...

C) In recent years, massive flooding has caused billions in damage and lost productivity. I propose a massive government spending program (paid for by number H below) and by a surcharge on Insurance companies profits. This program, similar to the construction of the Eisenhower highway system, would pay for the construction of massive pipelines between the Mississippi River, it's tributaries and the west. Texas and Oklahoma have faced drought and its associated cost, massive reservoirs in Nevada are at record lows while at the same time we have experienced record flooding on the Red and other rivers . If there were reservoirs in place and transfer capability in place we could move the water during floods and have it available during droughts. This would be a massive undertaking would cost Billions but would save lives, replenish aquifers and reservoirs, create jobs and ultimately save insurance companies billions.

D) End H1B Visas - There is no reason to import citizens of other countries to perform jobs that American's will do if given the opportunity and training. American companies must work with universities to ensure that they are turning out graduates with usable skills, NOT simply throw up their hands and hire from abroad.

E) End Pell grant and Stafford subsidies for degrees that America doesn't need and which won't result in an education with long term employability outlook. Google the term STEM (Science, Technology, Engineering and Mathematics) America needs more graduates with this type of training and currently has openings. Don't believe me? Go to Monster or Hotjobs and search on Engineering. There isn't a lack of jobs or opportunities in America, there is a mismatch between what we are training American's for and what the marketplace needs. Why isn't Pell and Stafford selective in what we are funding with taxpayer monies?

F) Create a windfall profit tax on the largest 1000 companies that are profitable, but don't increase employment by 10% between Jan 1, 2012 and Dec 31, 2012. The tax shall be equivalent to 100% of profit earned during that calendar year. Some reading this will say, that it isn't up to the company's to create jobs. Normally I would agree and suggest that the role of companies is to maximize profits for the benefit of their shareholders. However, this unemployment has reached crisis proportions for two reasons 1) In order to balance the budget, we need to not only cut spending, we need to increase revenue. In order to increase revenue we can either raise taxes or grow the tax base. In order to grow the tax base we need to employ more people. 2) People who are unemployed for long periods see their sellable skills atrophy and therefore they become less and less likely to EVER be employed. It is predictable that the jobs created will be low paying (except for those hired to replace the H1B visa jobs that are discontinued) However, this moves people off of the unemployment rolls and gives them the opportunity to re-build atrophied jobs skills. This needs to be a war on unemployment and the drastic actions necessary during war need to be employed. Half measures won't work.

G) Bring almost all of the troops home from almost everywhere.  I am hedging on details here because the United States has a vested interest in some areas of the world and some conflicts are just.  But right now ending Afghanistan, Iraq, Libya and others conflicts and brining those troops home allows for cuts in defense and grows that domestic economy when those troops spend their money in the domestic market.

This isn't an all inclusive list, but my analysis suggests that this combination of approaches would create almost 3 million net of civil servant layoffs new jobs in 2012. 3 MM jobs avg $30,000 per year = $90,000,000,000 in new payroll which yields new income tax revenue, social security tax revenue and new medicare tax revenue, while reducing unemployment insurance outlays.  These are the direct effects.  The indirect effects are that those newly employed would purchase things.  The typical multiplier used by economists to estimate private sector impact of spending is 10.  This means these newly employed would create $900,000,000,000 in new economic activity.  When you count the indirect effects, accomplishing the growth goals would reduce the deficit by 1/5 by increasing revenue to the government.

2) Reduce Government spending

H) Reduce the civil service workforce by 10% during 2012 and reduce the pay of those remaining on civil service pay by 10%. This may seem counter intuitive at first, but this again goes to the heart of getting government off of the back of small and medium sized business. By reducing government spending, you reduce the "crowding out" affect and make capital available to business.

I) The duration of unemployment must be limited to no more than one year  AND must require that folks receiving unemployment are in a re-training program designed to develop marketable skills.  If someone meets these criteria, they are employed at any paying job AND they are enrolled in a training program (apprentice, degree, certification) then the government should supplement their income for up to four years.  It may sound counterintuitive, and may increase outlays in the near term, but over time, these people with marketable skills will be employed for longer stretches and save government outlays on unemployment.  Fund the training program in addition to unemployment and provide the training at no cost to the trainee (unemployed). Technology and the marketplace are moving so quickly that job skills mismatch and obsolescence are a real threat to America's competitiveness and expectations about jobs skills training and the way we fund them have not kept up.

J) Cut the Department of Defense and Department of Homeland Security back to 2007 spending levels.

K) Elimination of Medicare Part D - This outlay was never funded by Congress, and it is the very heart of what I described above.  Current beneficiaries didn't pay into this program during their working lifetime, so they are borrowing against future generations taxes to pay for their medications.  A benefit that has a value of essentially zero to those who are being asked to shoulder this burden.

You will note that balancing the budget isn't simply done by growing the tax base without an acknowledgement that government often stands in the way and is spending too much money.  It is also necessary to reduce the size, scope and cost of government by about 35% in the first year. 

3) Monetize the interest on the debt

The last third of my proposal is going to be the most controversial.  Print enough money to cover the interest on the debt.  Once the budget is balanced, there is no longer a need to take on new debt.  By monetizing the interest, we eliminate the line item from the budget.  Because we start from the premise of a balanced budget and because T-Bills and other instruments of Government debt have a maturity date, over time, this expense will be extinguished.  But in the short run, it will save the government about $300B per year.

Some will say that this strategy will cause inflation.  They are right, it will to some degree.  While growth is the preferred strategy and there is an enormous amount of growth built into this plan.  Inflating is an undesirable strategy from an inflation standpoint, but it is ethical in that the inflationary effects are felt by the current generation.

So that's the plan in a nutshell, grow the tax base so that revenue to the government increase by about $300 Billion per year, cut spending by about $900 Billion per year and monetize the interest on the debt to save about $300 Billion per year.  This is how you balance the Federal Budget in a very short time span. 

Compare and contrast that with President Obama's proposed budgets or the Ryan plan each of which have us almost $30 Trillion in debt in ten years (President $28T Ryan $26T). If you like my plan better, support my candidacy on Votocracy.

Comments

[Locutisprime]

You have me on everything point but cutting defense spending. Been there, done that got the T shirt with Bill Clinton and Jimmy Carter before him (and currently with our present 'cheese whiz').

There is no such thing as a "Peace Dividend."

There is only vigilance.

[Tom Flake]

Locutis,

I would only say this. In 2007 the defense budget was about $350 Billion, today it is $700 Billion. Do you feel twice as safe? I don't know about you, but I felt adequately safe in 2007.

Personnally, I served during Reagan, Bush and Clinton. I liked Reagan's 600 ship navy vision. I liked winning the Cold War. Things have changed today. We are BROKE and that is affecting our national security more than the threat of invasion from anyone.

Hell, we spend more than the next ten countries combined on defense. So whether we need to spend twice as much as in 2007 or we need to spend more than the the next ten combined (some of whom are our allies).

Can we agree that some amount of waste is going on? AND that when we are borrowing that waste from future generations, we ought to be very thoughtful as to the benefit they receive?