How to Balance the Federal Budget Without Spending Cuts

Balancing any budget is “simply” a matter of making sure revenues in any period of time cover expenses.  A deficit for a relatively short period of time can be covered by borrowing.  But over a long period of time, the debt level is raised to a level that borrowing becomes increasingly more expensive and more difficult and in time may be impossible.  Historically this has proved true for governments as well as private organizations and individuals.  When this occurs, the resulting pain can be severe.  There is no reason to believe that the U.S. is an exception to this rule.

In previous blog posts, I have addressed some of the difficulties with cutting government expenditures.  But there are two pieces to this puzzle.  The other way to balance a budget is to increase revenue.  In the case of the government this means to increase tax revenue.  Notice that I didn’t say tax rates, but tax revenue.  It is important, I think, to remember that those are not the same thing.  When we, or the media, or the politicians, talk about raising taxes we really mean tax rates.  But it’s possible to raise revenue without raising rates.  Tax rates are a percent of something – e.g. income or sales or some other variable directly tied to economic activity.  So if the level of economic activity goes up, tax revenue increases automatically without the need for any congressional action.  If the level of economic activity increases enough, we could conceivably balance the budget without any other action.  For those of us who believe that Keynesian economics has some validity, the approach to balancing government budgets through austerity programs presents a dilemma.  For those keeping up with some of the European debates this is not new news.  For example, the EU has struggled for more than a year now (particularly with Greece) with how hard to push austerity programs to reduce budget deficits.  Because cutting government spending has the potential to hurt economic growth, it could, in turn,  reduce revenue and make deficits worse.  Increasing tax rates also has the potential to decrease economic growth rates.  But if there was some way to increase economic growth, the resulting increase in tax revenue might provide a way out of the deficit dilemma with a minimum of pain.

There is a recently published book, The 4% Solution, that is based on the fact that even at current government expenditure levels, a 4% growth in the economy would not only eliminate the deficit, but over the next few years could significantly reduce the total national debt.  The currently projected long-term growth rates are in the neighbor hood of 2.5% and since WWII our average growth rate has been an annual 3%.  We have grown at 4% over short periods of time, but not routinely or consistently over long periods.   Given our historical numbers and some specific headwinds that we are faced with today, it would be difficult, but probably not impossible, achievement.  The book contains a collection of 21 essays from some 21 different people with some impressive sounding credentials including 3 or 4 Nobel Prize winning economists and an author/theologian who has served in both Democratic and Republican administrations.  The one theme that seems to be common to all these ideas is that while this would not be easy, it could be done.  But none believe that it would happen without some changes (but no changes in tax rates or Federal Government spending).  At the same time, each author brings a different perspective.  Not all identify the same important factors and suggestions differ among them.

Two of the headwinds that we face in this endeavor that I believe  to be significant are the demographic of a numerically declining work force, and the fact of an increasingly competitive world-wide economy.  At the end of WWII, the developed countries of  Europe were torn up by the war, as was much of Asia.  We were clearly the leading manufacturer in the world,  were in the best financial shape, and had a rapidly growing, well-educated work force.  Signs of change were first seen in the 1970s with the Japanese product invasion.  Starting with motorcycles, then cars and TV sets, etc., they became the dominant manufacturers of much of what had been primarily American products.  Today we hear a great deal about off shore outsourcing.  Many things are now manufactured overseas in what are now developing countries.  There is good news and bad news to this.  The good news is that it tends to hold prices down keeping inflation – even in the face of significant deficits – from being a serious problem.  The bad news, of course, is that what had been U.S. manufacturing jobs are now done elsewhere.

There are other head winds to be concerned with – particularly what seems to be a decline in the U.S. education system.  But the point is that in a world-wide economy it is important for us to be able to stay competitive if we are to maintain a robust rate of growth.  The good news is that if we can remain competitive, and the current 3rd world countries continue to improve, the demand for goods and services can also grow rapidly.  So if we can stay competitive, we could get our share of that.  There are some ideas in the book about how we might do that.  But there are also other articles that are appearing in other places concerning things that affect our competitive position in the world.  For example, the Wall Street Journal had a fairly long article recently and there have been syndicated editorial page pieces in our local paper.

I have some mixed emotions concerning the possibility of not having an austerity program.  As I mentioned in a previous post, most organizations – the government included – tend to develop inefficiencies over time.  For private companies, a required austerity program provides a reason to do something that will improve its efficiency, but it is not fun and might not otherwise get done.  If we were successful in raising our growth rate to the point that a look at government efficiency would not be necessary, it would be a lost opportunity to figure out how to do more good with less money.  On the other hand, it would probably be more beneficial to more things to raise the growth rate and certainly less painful.

If you find any of this interesting, I would encourage you to read the book.  In the meantime, in the next post I will attempt to tell you what are the most important things that I think need to be done.

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About tjc13

BE - Chem Engineering, Vanderbilt Univ, MBA, University of Tulsa - Worked for an energy and chemical company for many years and then started a management consulting business working for both for-profit and not-for-profit organizations.
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2 Responses to How to Balance the Federal Budget Without Spending Cuts

  1. Wilhelm H Peterson says:

    Tom, This is a dynamic revelation of how to resolve our debt problem. You have the answers but how do we get the American people to elect Senators and Representatives who will support this solution? The Democrats have created a population of welfare recipients who care nothing about economics or financial facts – only about something for nothing regardless of the effect on our future solvency. We appear to be headed toward the decline of America just as virtually all other dominant civilizations have done. Frankly, the only solution I can see is to have the states, who still control voting laws, require that anyone receiving welfare will not be eligible to vote. This country started out allowing only freeholders the right to vote and I believe the states can still legislate such a law.

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    • tjc13 says:

      Bill, You make a good point and ask – as you know – a difficult question. I have 3 thoughts concerning your question:
      1- I’m not a politician. There is a whole body – it seems – of theory and knowledge about how to get people to vote for you. I think we are at the point where the skills and knowledge required to get elected is different than the skills and knowledge required to govern in a way that fosters creative (win-win) problem solving. John Kennedy was once quoted as saying that he enjoyed the political race more than he enjoyed the duties of the office once elected. Susan Peterson, once a news reporter on CNN Washington DC- left news reporting to train people how to act in front of a TV camera with a reporter asking tough questions. What she teaches has everything to do with making a good public impression and nothing to do with real problem solving. I passed her course, but I’m not a politician and unlike Kennedy, my interest is in the issues, not the race.

      2- Which gets me to my second thought. When I started this blog, my rule was to try to stick to subjects about which I had some knowledge and experience. Having worked in the private sector for a long time; working with large and small corporation, and non-profit organizations, and managing a fairly large organization – I think I know something about economics, team building and problem solving. I vote, but I don’t run and politics is not something that I think I’m an expert in. And how to get people elected is a political question. All of which gets me to #3.

      3- One of the political theories of the day apparently is that negative campaigning – throwing rocks and making personal attacks on the other candidates – is an effective way to get elected. Maybe so, but there are some of us who don’t think that is healthy for the “common good”. Another of my rules when I started this blog, was to not comment on specific politicians or political parties. Robert Samuelson, who’s column I read regularly, writes on economic issues, but in years of reading his column, I don’t ever remember his ever mentioning a politician or a political party by name. That’s has been my model – to talk about the issues not the people. More recently, there seems to be a grass roots movement started in the middle of the country to encourage “civil discourse”. The idea is that we would be better off talking about how to find creative solution to real issues rather than attacking people with our words. I learned about this from a friend in Tulsa who is a seminary president. I would support that movement. We need to find win-win solutions, but unfortunately politics is a win-lose sport. Maybe worse than that, our legal system is also a win-lose environment which has successful participants who are trained in adversarial relations who keep score based on wins and losses – ties are not allowed. And a lot of lawyers go into politics. Adversarial relations is not how one builds teams and finds creative, win-win solutions that serve the common good.

      All of this is a long answer to say, I don’t know how to solve the problem of getting people with the right knowledge, skill and abilities elected. But my hope in doing this blog was to hopefully provide some civil discourse directed toward real issues and possible solutions. And thereby, hopefully make a small contributions to the type of “civil” discussion that I think we need to be having about how to really solve real issues in a way that serves the “common good”. Maybe if we can change the focus of the discussion, and help people understand the real issues and solution options that we can get away from politics as usual, by improving voter understanding. Will that work, I have no idea, but it’s the one contribution that I think I can make.

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