I am proposing a simple plan to reduce the budget deficit and at the same time boost economic growth and reduce unemployment. Curtailing government expenditures and resolving the deficit crisis would result in a boom in the private economy with real GNP growth in excess of 3.0%. If government expenditures remain constant for three years, then the percentage of expenditures to GNP will fall from 24% to 20.5%. It sounds too easy but the numbers work. There will be no government layoffs and private sector employment should increase. This freeze will be hard on government workers and retirees on social security, but consider the pain private sector workers have endured over the last decade.
We have a very large economy with revenues and expenditures not surprisingly in the hundreds and thousands of billions. To get a feel for the size of federal expenditures consider the following. Tomorrow you get to write checks for a million dollars to 10,000 of your closest friends. The next day you have to find another 10,000 friends and write an additional 10,000 checks for a million dollars each. You then continue to do this for every day ever after without a break for the weekends or any holidays.
The public is now aware that the U.S. has a very serious continuing budget deficit problem, but few have looked at a summary of tax receipts or a summary of expenditures. On the following page is a table of budgeted tax receipts and expenditures for 2012. The first fact that jumps out at you is that we are not even coming close-tax receipts are only 65% of expenditures. All the peripheral countries in the euro zone have much higher ratios of tax receipts to expenditures. Surprisingly, interest costs on the debt are almost insignificant at $225 billion. This is the result of ten year Treasury yields below 2.0% and an average maturity of the U.S. debt of less than five years.
For those on the left, note that Medicaid and other social safety net programs (welfare, food stamps and unemployment benefits) total $791 billion. Contrary to the reports of the news media the U.S. spends a very significant amount on the less fortunate members of our society. For those on the right, note the $868 billion for defense and homeland security. Do we really need a navy larger than that of the next twenty five in size combined? Do we need the capability to fight two ground wars at the same time? Although the top corporate tax rate is 35%, the actual amount collected is about half the top rate and is only $237 billion.
President's Budget for 2012
|Individual income taxes||1,165|
|Corporate income taxes||237|
|Social Security taxes||572|
|Social Security safety net||536|
It is inevitable that there is great waste but how do you isolate a significant amount of it? It appears that there is no solution to the deficit. How can agreement ever be reached on what expenditures to be reduced? Regardless of the deficit or tax plan proposed, there is large opposition. The $1.2 billion sequestration approved by default in Congress last year is coming under growing criticism with half the cuts scheduled for defense. In every discussion, entitlements are ruled off the table for potential cuts and entitlements are more than half of the total budget. Given the current shaky state of the economy there is fear that any tax increase or spending cut will result in a recession. It's hopeless!
But it is not impossible. I am suggesting a simple solution which requires no cuts. The alternative is to freeze all government spending at its current levels. Salaries and benefit costs would be frozen for all government employees including the military (and Congress). Promotions would be allowed only to fill vacated positions. The cost of living adjustment for Social Security would be set to zero. All costs billable to Medicare and Medicaid would be frozen at their current price. This is a brute force solution to rising medical costs but it likely the only way to reform the health care system. The next time you are visiting someone in the hospital, walk around the floor, count the number of personnel that you see in the patient rooms and compare with the count you see in sitting at work stations. Why are they still physically writing on charts when computers are sitting on every desk? Unemployment and food stamps would also be frozen at their current amounts. Actual costs for the safety net should decrease as employment improves with the economy. The total of Social Security and Medicare would have to increase due to new participants but those costs would be offset by scheduled reductions in defense spending as a result of troop withdrawals from Afghanistan and Iraq.
It's not that hard and it would spread the pain. Federal government salaries and benefits have gotten ahead of the private sector. We need to force efficiencies in of the health care system. It can be done! The freeze may not be popular politically but that is no different from any deficit reduction plan. The freeze is fair and well balanced.
If the freeze was enacted, the private economy would grow at a faster pace since the uncertainty about government spending, the deficits and increased taxes would be removed. The economy should grow at 3% real with 2.5% inflation. In just three years, spending would be reduced to 20.5% of GNP. Tax receipts (no increase in rates) with higher employment and more capital gains should increase to 18% of GNP. The 2.5% gap ($450 billion) would be tolerable since GNP growth would be twice the deficit. The deficit as a percentage of GNP would shrink over time.
There is a limited time to act. The great conundrum of investing today is that Treasury rates continue to decline as the financial health of the government continues to worsen. Someday, the bond vigilantes will return to the U.S. and interest rates will spike. If in five years the average interest rate on Treasury debt increases to moderate level of 5.5% and the public debt, without action, climbs to $18 trillion, interest cost on the debt would rise to $1 trillion annually. The $800 billion in deficit reduction from the freeze would be offset by the rise in interest costs. To date the U.S. has been given a pass by bond investors and interest rates have remained low. We should take advantage of this opportunity by reducing the deficit now to ensure that rates remain at a low level.
Please pass this on to your friends and your Congressman.