Thursday, August 16, 2012

Government "Slashes" Spending and Spends More at the Same Time ... Scorekeeping in Washington

Let's look at what "slashing" or "dramatically cutting" government spending really means in government speak.

I'll bet it's not what the vast majority of our fellow Americans believe it to be. I'll also wager that most government officials like the fact that our fellow Americans don't "get" the joke.

But the joke's on us -- all of us. And we have to stop this "kidding around" or we're going to end up broke someday.

So now let's look at how government keeps score of spending increases or reductions year-to-year. Simply put, as the following illustration will make clear, they lie.

Government spends $100 this year and plans to spend $102 next year.

The way most of us count, that's an increase of 2%.

But not in Washington. That would be slashing spending, since the way "base line" budgeting in Washington works is that there will be no increase in spending if $104.30 is spent next year.

Thus, according to Washington, a real 2% increase to We the People becomes a more than 2% spending cut to the official counters in our nation's capitol.

And how do they pull off this magic trick? Well, just by a simple stroke of the congressional pen.

You see, they make the rules, spend more money and then are able to call it a cut in spending. Some people, like me, would call that lying, but in government it's just the way things are done. And measured.

So by spending more money and counting it as a reduction in spending, of course, that's "slashing" government spending. Isn't politics great? Can't we always trust our elected representatives to do the right thing? Or can we ever trust them to act in the best interests of We the People?

We report; you decide.

So if government spends $100 this year and $100 again next year, it would be "slashing" spending along the lines that someone like Paul Ryan would advocate.

That's the game being played. Isn't it great fun?

What's Really in the Ryan Budget tells the truth about things:

"Thanks to several years of fiscal restraint during the 1990s, the burden of federal spending dropped to 18.2% of gross domestic product by the time Bill Clinton left office. The federal budget today consumes more than 24% of economic output, a one-third increase since 2001 in the share of the U.S. economy allocated by politics rather than market forces. That makes the Republican House budget, which would reverse this trend, extremely important for the economic health of the country.

Both political parties deserve blame for the spending spree that's put America in a fiscal ditch. President George W. Bush was a big spender and President Obama has compounded the damage with his stimulus spending and other programs.

But the era of bipartisan big government may have come to an end. Largely thanks to Rep. Paul Ryan and the fiscal blueprint he prepared as chairman of the House Budget Committee earlier this year, the GOP has begun climbing back on the wagon of fiscal sobriety and has shown at least some willingness to restrain the growth of government. . . .

The most important headline about the Ryan budget is that it limits the growth rate of federal spending, with outlays increasing by an average of 3.1% annually over the next 10 years. If spending is left on autopilot, by contrast, it would grow by 4.3% (or nearly 39% faster). If President Obama is re-elected, the burden of spending presumably will climb more rapidly.

This comes as a surprise to many people since the press is filled with stories about the Ryan budget imposing trillions of dollars of "savage" and "draconian" spending cuts. All of these stories, however, are based on Washington's misleading budget process that automatically assumes an ever-expanding government. The 4.3% "base line" increase is the benchmark for measuring "cuts"—even though spending is rising rather than falling, and it's only the rate of spending growth that is being slowed.

Even limiting spending so it grows by 3.1% per year, as Mr. Ryan proposes, quickly leads to less red ink. This is because federal tax revenues are projected by the House Budget Committee to increase 6.6% annually over the next 10 years if the House budget is approved (and this assumes the Bush tax cuts are made permanent). Since revenues would climb more than twice as fast as spending, the deficit would drop to about 1% of gross domestic product by the end of the 10-year budget window.

To balance the budget within 10 years would require that outlays grow by about 2% each year. Spending in the Ryan budget means the federal budget reaches balance in 2040. There are many who would prefer that the deficit come down more quickly, but from a jobs and growth perspective, it isn't the deficit that matters.

Rather, what matters for prosperity and living standards is the degree to which labor and capital are used productively. This is why policy makers should focus on reducing the burden of government spending as a share of GDP—leaving more resources in the private economy.

The simple way of making this happen is to follow what I've been calling the golden rule of good fiscal policy: The private sector should grow faster than the government. This is what happens with the Ryan budget. The Congressional Budget Office expects nominal economic output (before inflation) to grow about 5% each year over the next decade. So if federal spending grows 3.1% annually, the burden of federal spending slowly shrinks as a share of GDP.

According to the House Budget Committee, the federal budget would consume slightly less than 20% of economic output if the Ryan budget remained in place for 10 years. This would be remarkable progress considering that the federal government is now consuming 24% of GDP vs. Mr. Clinton's 18.2% in 2001. If Paul Ryan's policies are social Darwinism, as Mr. Obama and his allies allege, one can only speculate where Bill Clinton ranks in their estimation....

One of the best features of the Ryan budget is that he reforms the two big health entitlements instead of simply trying to save money. Medicaid gets block-granted to the states, building on the success of welfare reform in the 1990s. And Medicare is modernized by creating a premium-support option for people retiring in 2022 and beyond. . . .

But good entitlement policy also is a godsend for taxpayers, particularly in the long run. Without reform, the burden of federal spending will jump to 35% of GDP by 2040, compared to 18.75% of output under the Ryan budget."

Summing Up

What a simple concept. Grow the private sector and restrain the growth of the government.

Adopt the "golden rule" of good fiscal policy and encourage the private sector to grow faster than government expenditures.

Then reduce taxes across the board so the private sector can thrive, as can We the People.

Then sit back and watch the budget come into balance as the debt albatross disappears.

Wouldn't it be nice if we had a genuine and realistic discussion about HOW  to accomplish the foregoing instead of whether we're "slashing" spending if we limit the growth of government to a smaller increase than the size of the growth of our economy?

It's time for truth telling.

Thanks. Bob.

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