In the three previous posts I've demonstrated why the deficits and debt are so harmful. Now, for the solutions.
1. It is quite clear that Washington does not have the discipline to stop wasting more of our money than they already tax. The only way to bring this discipline is a Balanced Budget Amendment.
a. It is true that if the budget was balanced in one year it would tank the economy. Therefore, and also because there will be no political will to do it immediately, the budget should be balanced gradually over ten years, at 10%/yr. The latest CBO estimate is that the deficit will be $606 billion; over ten years, this would require lowering the deficit by $60.6 billion/yr.
b. The healthiest way to reduce the deficit is to grow the economy--fewer people living off the economy, more people paying income tax. And the simplest way to do that is to distinguish between government "spending" and government "investment". See below.
c. The BAA would require that Congress meet the budget goal with any combination of decreased spending and tax increases if economic growth doesn't meet the goal by itgself. The former is much less harmful and much more desirable.
d. The BBA would also require that two additional years of deficit reduction by achieved, for a total of 12 years. This would generate a surplus of about $121 billion per year. The law would require that half of this be set aside for a "rainy day" fund to be released at times of recession -- plenty of states do this already -- and the other half be used to pay off the debt.
2. In considering what line items to cut or eliminate, Congress should use two criteria:
a. What spending is "spending" and what spending is "investment"? First, there is plenty of pure waste already, and putting pressure on Congress to balance the budget would force it to actually root out some of the waste. Second, there is spending that yields no (or negative) multiplier effect; defense spending is one well-documented example. It literally subtracts from the economy. On the other hand, unemployment relief (more on that later) is stimulative; 100% of those dollars are returned to the economy and have a multiplier effect estimated to be near 2.0. In a different sense, Head Start is also an investment rather than "spending", even though it has a much lower multiplier rate.
Government appropriations need to be tilted towards "investment" and away from "spending".
b. What does Washington (as opposed to the states) really need to spend on? Education is one area that where investment is best determined at local levels. Washington has no business spending taxpayer money on a local issue, much less also incorporating the inevitable waste that goes into a bureaucracy.
3. Aside from the non-stimulative effects of defense spending, we simply don't need a "defense" budget nearly equal to that of the rest of the world. In fact, "Defense" isn't defense; it's Offense, perpetuated by the military-industrial complex that Ike warned about 50 years ago. Nearly half of the current deficit could be eliminated by reducing "defense" alone.
4. Unemployment benefits should be capped at 26 weeks. Anyone who can't find a job within 26 weeks doesn't want to work. Extending unemployment benefits beyond that point simply enables people to be non-productive, and costs everyone because they aren't paying taxes. In the short-term, unemployment benefits are stimulative; in the long-term, they kill the economy by providing a disincentive to work. Unemployment benefits were meant to be a helping hand, not a lifestyle.
5. Any surplus generated beyond $121 billion would be devoted 50/50 to building the "rainy day" fund and paying off debt.
6. Medicare and Medicaid costs would be held down if the government simply decided to grow a spine and pay doctors and hospitals a lower price per procedure, and force the health-care industry -- perhaps the least efficient private enterprise in the country, thanks to government largesse -- to cut costs.
These are only the largest items. Social Security is a different issue because it has its own trust fund. There are plenty of other opportunities.
Of course, the odds that Congress will adopt this idea or anything like it are nearly zero. This is because nearly all politicians in Washington have been bribed. That's the subject of the next post.
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