Tuesday, November 30, 2010


Breaking down the actions in the United States that I expect from "Grow, Cut and Print or Default,"

Let's talk Cut. Start off with the realization that we will take in $2,318B this year and spend $3,608B. We're looking for more than $1,290B in annual spending reductions. This is not some 10 year calculation. It is add up revenue and expenditures.

The Cato Institute has published a full page advertisement. In it they outline certain positions on cutting government spending. These positions are further elaborated at their site Downsizing Government. Their positions are a good start. I'll enumerate their positions and add a few.

Eliminate Education Subsidies. $40B. Remove the Federal Government from Education. This is a local matter. Even state intervention in order to promote equality, driven by court rulings, has been a huge mistake in ensuring quality improvement in schools. If the basic need to ensure good education is "hire the best teachers, get the most out of them, and focus hard on students that lag, quickly" then absolutely nothing needs to be done at a Federal or State level. This is all local work. If rural and poor areas have schools that are slightly inferior because they can't attract the best teachers, tough. They'll do better than they are doing now, awash in money and red tape. Quality education is not a money problem, despite what the teacher unions say. Spending has more than doubled since 1980 without effect.

Eliminate Farm Subsidies. $25B.

Reduce Military Overreach. Eliminating unnecessary overseas missions (troops in Germany and Japan?) and ending nation building in Iraq and Afghanistan could yield $225B per year.

Housing. Exiting the Federal Government from the housing business would save $45B.

Federal Worker Pay. Cato says cut 10% for $20B. I say bid all jobs to market rates and save $50B.

Energy. Cato says that ending Energy subsidies would save $20B. I support some Federal help in clearing the way for clean energy - meaning nuclear energy - by eliminating legal and regulatory roadblocks in order to free the United States from dependence on oil imports.

Heath Care. The impression in the United States is that 'Medicaid works.' Little could be further from the Truth. Household budgets work if you ignore income as well. Replacing government bureaucratic control of healthcare with consumer led buying would save $100B. This could be implemented via sending insurance back to the 'insure for catastrophe' place it should be and putting folks on the hook to pay for their own basic care. In 1906 German insurance expert Alfred Manes. "An economic institution resting on the principal of mutuality, established for the purpose of supplying a fund, the need for which arises from a chance occurance whose probability can be estimated."

Modern health insurance stretches this definition of insurance to the breaking point. It incorporates the near certainty of someone going to the doctor and has become more of a payment system than a pooled risk system.

Getting from today's mess to rational price transparency so that people could make informed decisions will take some work. Programs for the poor contained in Medicaid should be reimplemented in a least cost delivery model - think corner clinics, not a middle class - choose your own doctor - model.

Drug war, Privacy and TSA. Cato says returning drug policy to the states and decriminalizing certain things would save $15B. The spending going in to airline safety, monitoring telephone calls and internet messages would probably, likewise add another $15B if reduced.

Social Security. Cato wants private accounts and estimates a savings of $50B in 2020. This program was not intended to be a pension for all citizens, but a safety net for those that could not provide for themselves. This should be recast and implemented as a negative tax. It should be aggressively income controlled against a poverty level that does not include luxury items (by this I mean cable TV, phone service, etc). Living on social security should be two notches above avoiding starvation. I cannot produce an estimate of the savings.

Transportation. There should be no subsidies to states for roads beyond what is needed for national defense. $20B

This sounds pretty drastic. This adds up to almost HALF of what we need to cut, or $550B. This is on our annual spending.

On the 'tax expenditure' side - this is Orwellian political speak for tax breaks which if eliminated raise revenue, we probably need to just implement the AMT for everyone and create a flat tax through its gradual inflation aided implementation. This would put us on a path toward a two bracket income tax structure with rates of 26% and 28%. It would raise $112B in 2011 according to the Tax Policy Center. Combine that with eliminating the wage cap on social security payroll taxes for another $100B and you're starting to get in the ballpark.

Accurate Reality: To get out of this mess, we've got to balance annual spending first. This means drastic changes in our expectations of the Federal government and huge cuts in expenditures. Assuming we balance the budget, then we should be able to avoid default, provided we also print and grow.

1 comment:

  1. It is sobering how difficult this problem is to solve when you consider how much serious pain is required to make a dent in it.