Balancing The Federal Budget

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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Issue

The total government debt which has been accumulated over time is about $14 trillion. The annual economic output of the United States is about the same, subject to variations in economic activity. There is widespread agreement on all sides that the Federal Government, with power over its own spending in annual budget negotiations between the Executive and the Legislative branches, the Congress vested by the Constitution with the power to control the purse strings, is spending beyond its means. The means are tax revenues. The government’s annual budget is about $4 trillion. Government revenues fall short of government spending by at least $1 trillion every year leading to the overall imbalance of about $14 trillion over the years.

Relevance to the people

As the overall government indebtedness to those within its borders and to foreigners, through the sale of government bonds, approaches and exceeds the capacity of any country to produce goods and services, because the lenders gradually lose confidence in the ability of the country to repay and, therefore, will ask more in interest to keep lending, whether those lending be Americans or foreigners. Servicing the interest adds to the budget burdens of the government.

If the government continues to live beyond its means, the rising cost of borrowing will also increase the cost of investing in machinery and people because the interest rates of long-term government bonds are tied to the long-term borrowing costs of businesses and households. This will, therefore, raise prices and wages. Which, in turn, will decrease the purchasing power of the US dollar.

To maintain the purchasing power, the Federal Reserve will have to raise interest rates in the immediate future to slow down the economy, setting into motion a downward spiral of gradually diminishing economic activity.

Therefore, the government has little choice but to constrain its spending to annual tax revenues, whatever they may be, which is also known as the budget constraint, because despite its ability at the Federal level to print money, the government’s books are no different over time from that of a normal household.

What the Congress and the White House Should Do?

The Federal government is different from the state and local governments in that it can print money and issue debt. In the event of wars or other needs which could arise the government needs flexibility to spend more than its means provided those expenditures are justifiable by the scheme of Constitutional checks and balances, as the framers had intended. This is why, the Federal government is not required by the Constitution to balance its annual budget, but does so out of a sense of fiscal responsibility. The government, therefore, must not amend the United States Constitution to pass a balanced budget amendment.

The government must, instead, pass legislation to:

Require that the annual Federal budget be frozen until Fiscal Year 2021 at the level of Fiscal Year 2012, in 2012 dollars, whatever the annual rate of inflation used by the Treasury Inflation Protected Securities (TIPS).

Require that the debt ceiling must not be raised for Fiscal Year 2012 and thereafter until by 2021 the cumulative government debt at least diminishes to 60 per cent of the projected 2021 annual income in 2021 dollars from the current level of about 100 per cent in 2011 dollars.

Require that all Treasury debt issuances, domestic and foreign, be frozen with immediate effect until Fiscal Year 2021.

Require that the Federal Reserve finance the government budget deficits through 2021 through the purchases of outstanding Federal debt.

Require that Federal Reserve policy be reformed to include an inflation targeting range of 0-5 per cent consumer price index (CPI), the Federal Reserve Act as amended, with comprehensive data releases, including the Federal Reserve’s Greenbook and Bluebook, within 3 weeks of every interest-rate setting meeting at a press conference held by the Federal Reserve’s Chairperson. For how Federal Reserve policy can be adjusted to suit the current circumstances in concert with the rest of the government and to be consistent with this legislative proposal also see: The Impending Government Shut Down.

Require that the annual Federal budget be passed into law no later than the last day of the preceding fiscal year or September 30th of every year.

Require the Federal government to balance the budget every 10 years, beginning Fiscal Year 2012, to allow for economic ups and downs and to give sufficient flexibility to finance unforeseen expenditures, upon the advice and consent of the United States Congress, through borrowings by issuing debt.

Require that the ratio of the overall government debt to the annual income of the United States shall not exceed 60 per cent at any given time.

Require that by 2021 the Congress must decrease the cumulative government debt to 60 per cent of the projected annual income in 2021.

Require that comprehensive tax and international trade reforms be studied, formulated and passed into law to increase tax receipts and to direct real investment, domestic and foreign, into the United States.

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3 thoughts on “Balancing The Federal Budget

  1. BUDGET DEVELOPMENTS

    The Washington Post is reporting in its online edition of its Saturday, 07/16/2011, newspaper in the article titled “Top lawmakers press forward on debt plan: http://wapo.st/oGP7fB,” that two primary bargains are underway in the Senate on the issue of the debt ceiling and balancing the Federal budget (as Secretary Clinton commends Greece on its austerity measures, http://www.nytimes.com/2011/07/18/world/europe/18clinton.html?_r=1&hp).

    WHAT SHOULD BE DONE?

    The Congress and the White House must honestly return to the drawing board and as the 1776 legislative proposal above suggests:

    Step 1: Commit to passing budget principles by September 30, 2011, and then

    Step 2: Negotiate within the budget constraints dictated by those principles to reform government to be able sustainably manage future spending, by 12/31/2011.

    WHY?

    (A) “CUT, CAP AND BALANCE” APPROACH OF THE CONSERVATIVES IN CONGRESS

    1776 ENDORSEMENT: WORKABLE

    The “cut, cap and balance” approach of the conservatives to force the issue using an annual budget constraint of 18 per cent of GDP from the current 24 per cent is unworkable because it would be inflexible. The conservatives in Congress would be on the right track, however, if they agree to freeze the current annual spending at the 2012 Federal budget in 2012 nominal dollars for the next decade without indexing for inflation as the 1776 proposal above discusses.

    (B) “GRAND BARGAIN” (BOWLES-SIMPSON, “GANG OF SIX”)

    1776 ENDORSEMENT: WORKABLE

    To bring the national debt down by about $4 trillion in a decade from now. The net result of this budget circus would be to keep the government running by periodically raising the debt ceiling as needed under the cover of the rhetoric of budget and government reforms to manipulate expectations of the buyers of US debt, domestic and foreign to obviate any debt crisis without solving the fundamental problems, because:

    (i) The emerging coherence of the “Grand Bargain” and the opinion of Standard and Poors to downgrade US debt if the bargain is not in place appears to be in sync with the Erskine Bowles-Alan Simpson report on government reform to take a pay-go approach to containing government spending over the budget window of a decade. Any differences between the Bowles-Simpson Commission and the Gang of Six (Democrats Dick Durbin of Illinois, Kent Conrad of North Dakota, and Mark Warner of Virginia and Republicans Tom Coburn of Oklahoma, Saxby Chambliss of Georgia, and Mike Crapo of Idaho) approach can be ironed out through reconciliation rather than discord.

    (ii) The “Grand Bargain” is being put off until the end of the year with no coherence to the annual budget cycle, unless the White House is expecting to propose any compromise emerging from BOWLES-SIMPSON and the “GANG OF SIX” as a part of its FY 2013 budget proposal, an idea that is tenuous at best if not preemptively reconciled with the dynamic of the November 2012 election, no matter which party’s candidate becomes president or controls the chambers of Congress.

    (C) STOP GAP MEASURE (McCONNELL-REID)

    1776 ENDORSEMENT: NAY

    The minority and majority leaders in the United States Senate, Mitch McConnell (R-KY) and Harry Reid (D-NV) are preparing to put forward a stop-gap bill, as the Congress prepares for a “Grand Bargain” by the end of this year of reducing the national debt by $4 trillion in a decade, to permit the Obama administration to raise the debt ceiling by $2.5 trillion in 3 increments over two fiscal years or to a total of $17 trillion: 2012 and 2013, the economic implication being that raising the debt ceiling will lead the economy to grow to $17 trillion by 2013 and the political implication is to blame the conservatives in Congress who oppose it if the economy does not do well.

    There are issues with this approach:

    (i) The stop-gap bill kicks the can down the road, something President Obama promised he would not do in one of his State of the Union addresses. The Congress would indeed be punting if it endorses the McConnell-Reid plan.

    (ii) The government has no plan to pass any annual budget before the previous budget year ends, a mechanism which appears to be to keep on adding to spending without tying its hands by passing a budget before September 30th of each year.

    (iii) It is likely, given the past performance of the United States government on spending, despite the $1.5 trillion proposed spending cuts in the McConnell-Reid plan that is taking shape, that on net national debt will keep in rising.

    These issues when put together cannot but lead observers to the conclusion that the government is capping the national debt at about 100 per cent of GDP if not steadily creeping higher similar to Japan’s for the foreseeable future, a knife edge gambit given the currency risks, not only for the United States but for the G7 (Japan’s debt is hedged by US debt) and the G20 as a whole once debt as a per cent of GDP is at or above any country’s GDP, a negative feedback loop strategy to maintain US economic competitiveness in the face of emerging market growth, paying off Wall Street for it and asking Main Street for sacrifice to expand government and the welfare state rather than working hard as elected representatives ought to to bring relief to American Main Streets sooner than later.

  2. The House passed “H.R.2560 — Cut, Cap, and Balance Act of 2011” with a vote of 234-190 (9 Republicans crossed party lines and voted with the Democrats against the bill and 5 Democrats did the vice-versa, with Congressman Ron Paul, Republican of Texas, voting against the bill).

    1776 ENDORSEMENT: NAY

    Roll Call: http://clerk.house.gov/evs/2011/roll606.xml

    A Congressional Research Service (CRS) Summary can be found at:

    http://thomas.loc.gov/cgi-bin/bdquery/D?d112:1:./temp/~bdECn5:@@@D&summ2=m&|/home/LegislativeData.php|

    The key provision of the vote, besides its excessive focus on the White House agenda to leave the large mandatory spending and selected discretionary spending alone without taking into consideration all of the government outlays for government reform, is the condition that the House will agree with the president, and Senate leaders McConnell (R-KY) and Reid (D-NV) to raise the debt ceiling to $16.7 trillion provided this bill is transmitted to the states for consideration to amend the Constitution for a balanced Federal budget.

    The Senate, however, has its own bills, as discussed in the main body of this legislative proposal above, and H.R. 2560 MUST be reconciled after negotiation, to send it to the president for signing before September 30, 2011 to begin Fiscal Year 2012 on October 1, 2011 without the need for any continuing resolutions as a first step toward reforming the budget process. To this end, the Congress must first amend the Congressional Budget Act (CBA) of 1974.

    Hopefully, the emerging dynamic would reconcile (A) and (B) in the above comment to be able to produce a workable compromise.

  3. Senators Reid, McConnell, and President Obama got what they wanted. Conservatives failed. The voting process is not material. The deal will pass because of the deadline. The votes Yea and Nay are known before any deal is reached. Senators Reid and McConnell and President Obama should not strong arm the country into an attack on the debt and dollar.

    See:
    Debt Ceiling: On the Inside Or The Outside?
    The Coming Debt And Dollar Crisis

    1776 Endorsement: NAY

    What the Congress And White House Should Do Before Tomorrow, Tuesday, 11:59 P.M 08/02/2011?

    1. Freeze federal budget in Fiscal Year 2012 dollars without indexing for inflation until 2022.
    2. Require the Federal Reserve to fund the variable annual budget deficits directly.
    3. Require that the Federal Reserve conduct industrial policy to create domestic jobs.

    Congratulations to all members of Congress who voted NAY 08/02/2011.

    http://ctamirisa.wordpress.com/2011/08/06/august-05-2011-sp-mr-president-america-not-good/

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