Wednesday, January 26, 2011

Balancing the Budget

It is still possible to avoid the budgetary collapse of the federal, state, and local governments. All it would take is politicians of courage and integrity, which is why it is unavoidable that this country will experience said budgetary collapse.

Saving government budgets will require a mix of both tax increases and spending cuts, but it will have to be different from all former mixes of tax increases and spending cuts. In the past the governments would offer the people a deal, wherein taxes are raised now and three years down the road the spending cuts would kick in. Democrats would make this offer, promising to reverse course and cut spending. Republicans would make a big show about how they are reluctantly accepting the deal, because they want to vote for tax increases but want to tell their constituents that they do not want to vote for tax increases. Three years later, everything is changed and the spending cuts do not happen. Some people have forgotten the deal. Republicans act shocked that the Democrats betrayed them. Sometimes there are some minor reductions in the rate of increase.

A real effort to balance the budget would by necessity include real spending cuts. The whole dollar amount of the budget would have to be smaller than the whole dollar amount the previous year. It would not be inflation adjusted dollars, it must be nominal dollars.

A second point would be to refuse the phony deal of "taxes now and cuts later." Any effort to balance the budget based on a combination of tax increases and spending cuts must have spending cuts come first. Politicians are loathe to cut spending, and always look for an excuse not to. By putting it first, and not implementing any tax increases until spending is cut forces them to act in a responsible manner in spite of their own wishes.

A third point of difference between a real effort to balance the budget and phony past attempts at reform would be the ratio of tax increases to spending cuts. In past deals, the alleged rate would be dollar for dollar, one dollar of tax increases for one dollar of spending cuts, although the cuts never actually materialized. In order to balance the budgets now, it would require probably about twelve dollars of cuts for every dollar of increased taxes, perhaps more. A ratio of twelve-to-one is a good place to start though, considering the need to pay off the enormous accumulated debt. Government spending is currently about 30% of GDP, and taxes are currently about 18% of GDP; impelementing a twelve-to-one ratio will result in 18% for spending and 19% for taxes, a small but real surplus.

Admittedly, for those who have grown dependent on government, cuts of that magnitude would be painful. And for those who actually pay the taxes, even that much more of a tax increase would also be painful. For the former there is little cause for sympathy, but the latter will eventually see a benefit. As the debt is actually reduced the value of the dollar will increase, giving the country the relief of a much needed deflation. Unlike the phony investments by government, this would be an investment that would eventually pay off.

This would require great personal courage on the part of elected officials; they would have to make the tough choices and take responsibility for their decisions. That is why the budgets will collapse instead. It is important to offer this advice, although it will never be followed, because an accusation often hurled at libertarians is that they do nothing but criticize and never offer any suggestions. Libertarians do offer plenty of suggestions, but most libertarian suggestions are anathema to statists and thus "don't count."

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