Sunday, August 07, 2011

Brilliant suggestion to balance the budget . . .

Received this from my dad's wife. I tracked it down to's PunditKitchen.

Apparently, Warren Buffett was on CNBC back on July 8th when he said he could end the federal government deficit in five minutes. I'm afraid even he didn't quite get it right, but he definitely suggested the way. His brilliant idea:
You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection.
Good luck getting Congresspeople to agree to such a law! But, hey!

But how did he go wrong? you ask.

Three percent of GDP is still a deficit. Indeed, it is a rather severe deficit. In a $15 trillion economy, that's a $450 billion deficit. And, as one of my previous posts noted, it's not even touching the larger problem of debt. The size of the debt itself--on which interest must be paid--is continuing to rise.

Still, as I say, I think Buffett has pointed the way: There must be significant negative (painful) consequences for those "public servants" who are unwilling to do their duty to ensure fiscal responsibility.

While I'm at it, I thought I would offer an update on my July 30 post about The difference between debt and deficit. At the time I said that Senator Mark Udall of Colorado either didn't understand the difference between a deficit and a debt, or he was cynically playing upon the lazy thinking of his constituents when he suggested that "The President's National Commission on Fiscal Responsibility and Reform, chaired by Erskine Bowles and Alan Simpson, came up with a set of recommendations that would reduce the debt by over $4 trillion over the next decade."

Well, he wants credit for coming back with a proposal for a balanced budget constitutional amendment, "the first Democratic senator in many years to introduce [a] balanced budget amendment."

Key components:
  • Requires that the federal budget be balanced each year unless 3/5ths of each House (60 votes in the Senate) vote to waive.
  • Requires the President to submit a budget each year that is balanced.
  • The provision would be waived when the U.S. is in a declared time of war.
  • It would create a Social Security lockbox that protects the revenue and outlays of Social Security from any balanced budget requirement.
  • It would prohibit Congress from providing income tax breaks for people earning over $1,000,000 a year, unless we are running surpluses (those surpluses must also not be eliminated if such a tax break were enacted).
My comments:

The first three points make eminently good sense.

The last one, too, seems reasonable. I'm not sure how it can possibly go into effect without massive court battles. For instance, what is an "income tax break"? If Congress at some point decides to raise taxes on those earning over $1,000,000 a year so that they must pay, say, 70% of their marginal dollars in income tax (while persons whose income is $999,999 must pay, say, "only" 50% of their marginal dollars in income tax), if someone subsequently suggests the top marginal rate should be reduced to 60%, is that an income tax break?

What if someone who makes more than $1 million wants to take advantage of a tax write-off, say, available to those who invest in green energy. Will such a write-off be disallowed because it would "provide an income tax break" to that wealthy individual?

But the one proposal that really bothers me is the fourth one: to "create a Social Security lockbox that protects the revenue and outlays of Social Security from any balanced budget requirement."

What is that supposed to mean?

It is the case, already, that Social Security is "off-budget" and treated separately in certain ways from other Federal spending, and other trust funds of the Federal Government.
Pub. L. 101-508, title XIII, Sec. 13301(a), Nov. 5, 1990, 104
Stat. 1388-623, provided that: "Notwithstanding any other provision
of law, the receipts and disbursements of the Federal Old-Age and
Survivors Insurance Trust Fund and the Federal Disability Insurance
Trust Fund shall not be counted as new budget authority, outlays,
receipts, or deficit or surplus for purposes of -
"(1) the budget of the United States Government as submitted by
the President,
"(2) the congressional budget, or
"(3) the Balanced Budget and Emergency Deficit Control Act of
1985 [see Short Title note set out under section 900 of this
Congress has been raiding Social Security for just about "forever"--using all funds brought into the Social Security system to fund current government expenses. I.e., the approximately $2.6 trillion Social Security trust fund consists solely of federal government IOUs--sorry: debt.

So the only way any Social Security obligations will be paid is by taxing current and future taxpayers to cover the outstanding obligations. Same kind of thing with Medicaid and Medicare. They are not pre-funded. There are no assets sitting around waiting to be utilized to cover future expenses. Same thing with all the mandatory spending programs of the federal government (expenditures in the U.S. budget that are mandated by programs outside of the budgetary process, including Social Security, Medicare, Medicaid as well as Food Stamps, Unemployment Compensation, Child Nutrition and Tax Credits, Supplemental Security for the Disabled, Student Loans, and Veterans Retirement programs.)

According to Kimberly Amadeo of, mandatory spending is slated to total $2.109 trillion in FY 2012--in other words, very nearly 100% of real income of the federal government.

Forget defense. Forget Health, Education and Welfare. Forget EPA, OSHA, FAA, FDA, USDA, and so on and so forth. You could cut out 100% of all the "optional" programs of the federal government, and you still couldn't balance the budget . . . unless you make massive changes in the enabling laws--the basic rules--surrounding all of these social programs.

It can't be done.

Well, finally, this.

My sister sent me a summary of something Dave Ramsey said:
If the US Government was a family, they would be making $58,000 a year, they spend $75,000 a year, and are $327,000 in credit card debt. They are currently proposing big spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget and debt, reduced to a level that we can understand.
I replied:
That was interesting, Miriam. I really appreciate your sharing that. It puts things into a more manageable perspective.

But something didn't seem right about the numbers. The spending seemed too low. So I did a little checking.

Based on what I can find—from the 2010 federal budget (see charts on the right hand side of the page; data from the Congressional Budget Office Historical Tables) . . .

If we start with a family income of $58,000 and multiply by the proportion of spending as compared to income of the federal government (divide by 2,162, then multiply by 3,456): you've got a proportional annual spend of $92,714!

Oh. And when it comes to “cuts”? Supposing Congress actually follows up on them all, we're looking at a reduction in annual spend from approximately $93,000 to $82,000 ($93,000 * (3,056/3,456)). So that’s nice. The family is proposing “only” to go into further debt at a rate of $24,000 a year instead of its former $35,000 a year!

Finally. It’s probably unfair to call it “credit card debt,” since credit cards are generally considered short-term debt and are charged at a much higher rate than the federal government. But that’s a relatively minor quibble. With an acknowledged debt of about $15 trillion and an income of $2.2 trillion (approximately), we find ourselves with a debt multiple of 6.8 [15/2.2]). Multiply $58,000 by 6.8 and you come up with the proportional total debt of this family: about $395,000.

Families with annual incomes of $58,000 generally aren't permitted to purchase $395,000 homes . . . or to wrack up $395,000 debts. Not normally, anyway! They can't pay their debts back. Especially not when their standard and expected annual expenditure--for years and years--is and has been significantly more than their income. (Even--to use Buffett's example--a "modest" 3% deficit for a family with annual income of $58,000 is $1,740. But when the family is borrowing--and seems intent on continuing to borrow $24,000 more every year for the next 10 years, at least?)
And Steve Forbes, Larry Summers and others see the S&P downgrade of American credit worthiness as an "outrage"?!? Would you want to lend to a family with this kind of credit profile?
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