The Budget Plan

By Tom Campbell

The White House has just announced the new Fiscal Year 2011, with a projected deficit of 1.27 trillion dollars. Last year, the budget was announced with an estimated 1.17 trillion dollar deficit, and it now appears the actual number will be 1.60 trillion. Applying that same likely growth from projection to actual deficit, we are looking at a federal budget deficit likely to reach 1.74 trillion dollars this year.

That size of deficit is unconscionable. We print the money and spend it, or we borrow the money and spend it. When we print the money, we set the stage for massive inflation, which will occur as soon as the economy revives. When we borrow the money, we place a lever in the hands of other nations' citizens and governments, which are now our largest creditor (surpassing the 50% mark two years ago). It is morally wrong to spend money now and make our children pay for it. It is intergenerational theft. And it is hazardous to give to foreign sovereigns so great a lever over us, as to threaten to "call in our loan."

It is our duty to stop this. We cannot send it to another generation. As President Reagan said in a related context, "If not us, who? If not now, when?" If we didn't borrow another dollar, just to pay back what our country already owes would take more than 300 years.

I call for an alternative approach. We can stop the debt from growing by lowering the federal budget deficit to zero. We've done it before. The federal budget last balanced in 2000. The mechanism was Gramm Rudman Hollings, a law that has now been allowed to expire. What Gramm Rudman Hollings did was to require across-the-board cuts if the President and Congress did not reach agreement on specific yearly deficit reduction goals that had been set in advance. It supplied the backbone when backbone was lacking. We need to restore Gramm Rudman Hollings at once.

And we also need leaders in the House, Senate, and White House who will agree the time is now, the responsibility ours. I propose to lower the federal budget deficit by more than half over that the White House budget provides for Fiscal Year 2011.

Here is the outline of my plan. I invite all who read this to help fill in with specifics, especially programs that we do not absolutely need that can be eliminated from the federal budget. For every such program proposed for elimination or reduction, I know there will be criticism; I only ask that any who wish to criticize suggest what they think is better. Doing nothing is not an option.

NON-DEFENSE DISCRETIONARY

The White House budget claims to cap this item at 670 billion.

However, this category was allowed to grow by almost 20% from FY 09 to FY 10. Let's cap it at its FY 09 level of 581 billion.

SAVINGS: 89 BILLION

Specific Items:

Note: there are many specific items in this category that might be eliminated entirely, in achieving the overall reduction. Among candidates I would put forward are the 3 billion annual expenditure in subsidies for corn ethanol, and the net losses incurred by Freddie Mac and Fannie Mae. Selling those latter two agencies will not only save us that annual cost, but, had we done it sooner, it would have saved us the 200 billion bail-out cost last year, and would also have prevented giving what was perceived as a government imprimatur to mortgages that were not commercially viable. That implicit imprimatur was a fundamental cause of the fiscal crisis in which we are still mired.

STIMULUS MONEY

202 billion was spent in FY 2009. 353 billion is proposed to be spent in 2010, and 232 more in FY 2011.

There is no reliable evidence that this has produced 2 million more jobs than the private sector would have with the same resources, as the President claims.[i]

Take the proposed increase over FY 2009: 585 billion, and cut it in half.

SAVINGS: 292 BILLION

Redirect the remaining 292 billion to forgiving FICA tax for hiring new employees from among those who have been out of work for at least 2 months. Add it to 33 billion the President has proposed for tax relief, but only for small business hiring. This will increase the assistance targeted to new jobs in the private sector by ten-fold. It will also afford this incentive to hire those who have been out of work to all employers, whether large or small.

100 billion more has been asked, in a new list of targeted projects, the so-called "Jobs Bill." But, with more than half of last year's "stimulus bill" not yet spent, save this money, pay down the debt.

SAVINGS: 100 BILLION

TARP

Congress appropriated 700 billion to purchase toxic assets off the books of banks. Not one dollar of that money went for that purpose. Instead, the money was spent to buy bank stock. Now, banks are returning the TARP money. The President is proposing spending 200 billion of the returned money to stimulate lending by small banks, with social goal requirements very similar to those that Congress and the Presidents Clinton and Bush insisted for Freddie Mac and Fannie Mae, over the last decade--which did a great deal to get us into the financial crisis in the first place. Don't spend this returned money, reduce the debt instead.

(Note: specific items I would have opposed in what was already done include the 50 billion used to bail out General Motors with a special bankruptcy proceeding, much more generous to the union than normal bankruptcy would have afforded. The use of TARP money for this bailout was a particularly egregious stretch of the authority granted by Congress.)

SAVINGS: 200 BILLION

REJECT PRESIDENT'S TAX INCREASES

The President has proposed two tax increases, one on banks, one on upper income Americans. Reject them both. Banks that didn't take TARP money, and banks that have repaid their TARP money, should not be singled out to pay more taxes. Indeed, if we want banks to lend more, taxing them more is counter-productive--they will have less to lend.

Allowing the Bush Tax Cuts to expire as to families making more than $250,000 constitutes a tax increase on high income earners. With 50% of federal income tax currently being paid by 4% of the population, there is no basis in fairness to tax high income earners any more.

Increasing taxes is scored by the White House as helping to close the deficit. However, a dynamic, as opposed to static, scoring method would take account of the effect of a higher tax to depress economic activity, hence not raising as much revenue as a static model would predict. To be conservative in estimating the budget deficit effect, however, I will use the White House's static estimate of revenue raised by their proposed tax increases.

INCREASE (USING STATIC MODEL) IN DEFICIT: 49.4 BILLION

MEDICAID

Medicaid and SCHIP are 7% of the budget. This category went from 224 to 290 billion from FY 09 to FY 10, a rise of almost 30% in a single year. We need to approach this the way we did with welfare in 1996: don't trim at the edges but announce that there will be a cap and stick with it. With welfare reform, that cap was a work requirement after 2 years, and a lifetime cap of 5 years. That approach has saved billions of dollars, and also brought about an end to the nature of welfare as an "entitlement." So also with Medicaid. We will spend no more next year than this, except for an increase to cover the eligible population and the general inflation rate. That would put Medicaid at 304 billion, rather than the proposed 350 billion, for next year. Reverse the presumption that Medicaid will cover everything. That's "entitlement" thinking. Instead, use the funding for Medicaid, and SCHIP, and the states' contribution to each, to purchase insurance policies for the covered population AT A FIXED PRICE. Instead of going to the insurance markets announcing that we must cover so many conditions and treatments, government would announce, this is how much we have to spend, and will use its bargaining power to get the best coverage possible, FOR THAT FIXED SUM. The effect will be to enhance government's bargaining power with health insurers. (I also advocate repealing the antitrust exemption for health insurers, allowing the interstate sale of health insurance policies, and adopting serious litigation reform, that Price Waterhouse has estimated would lower the cost of health care in America by at least 10%.)

SAVINGS: 45 BILLION

The federal government claims to have a Social Security trust fund; but, in reality, it is merged into the general fund in order to make the deficit appear lower. Social Security is 21% of the consolidated budget.

Recommendation: Split off Social Security from the general fund. Further recommendations to guarantee that all social security/medicare recipients are protected, and that their trust funds are solvent, will be forthcoming

TOTAL SAVINGS IN FY 11: 676 BILLION

White House estimated budget deficit in FY 11: 1.27 TRILLION

EFFECT OF TOM CAMPBELL BUDGET PROPOSAL: 594 BILLION DEFICIT, A REDUCTION OF 53%.

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[i] President Obama's claim of 2 million jobs created/saved by the American Recovery and Reinvestment Act-known more commonly as the stimulus-is based on an estimate from the Council of Economic Advisors in a report dated Jan. 13, 2010. The estimate is based on an economic model-not actual data-which seeks to predict the effect that injecting money into the economy has on the nation's unemployment rate. The figure listed by the official federal government scorekeeper, see Recovery.gov, is calculated by assuming a 40 hour work week for each worker. Each quarter-year, therefore, a hypothetical worker would put in 520 hours at his/her job. The total number of hours are reported by anyone receiving stimulus money. Further, according to on-line journal ProPublica.org, pay raises can be counted as stimulus jobs as can projects that use existing workers to fulfill a contract, (Chrysler received $53 million to make 3,000 government vehicles using existing workers, whose hours would count towards the stimulus job count.) The obvious problem is that we do not have a good sense of what jobs would have been created if the same amount of money had been left in the private market. The fundamental assumption is that the government will create jobs that private industry will not; and that is by no means clear. One thing is clear, however, that the government created jobs will not be as permanent as private sector jobs. Perhaps a better way to look at the job situation during President Obama's first year as President comes from the Heritage Foundation. /"In January 2009, non-farm payroll employment totaled 134.3 million jobs. The White House estimated that without stimulus, the number of jobs would fall to 133.9 million, while the stimulated economy would total 137.6 million jobs by fall 2010. The stimulus was enacted, yet the number of jobs has since fallen all the way to 130.8 million. This represents:/ . /A net loss of 3.5 million jobs overall;/ . /A net loss of 6.8 million jobs relative to the White House's projection with the stimulus; and/ . /A net loss of 3.1 million jobs relative to the White House's projection even without the stimulus."/