Tag: fiscal restraint

Budget Hero Revisited

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A post from last year that came up in my daily archive caught my attention with its title, A Budgetary Hat-Trick, I had a look to remind myself and rediscovered Budget Hero. When I played last year the budget was projected to go bust in 2033 barring any changes and I managed to balance the budget, increase security, achieve energy independence, and eliminate government waste at the same time so that the budget bust date was pushed back to sometime after 2070. When I looked this year I saw that the game had been updated after the stimulus and bailouts of the past year. The budget is now scheduled to go bust in 2028 without changes. That made me curious about whether I could still balance the budget. Remembering that all of this is completely dependent on the assumptions built into the game, here are the results I got.

I was able to balance the budget and run huge surpluses within 9 years by cutting virtually everything I could think of and jacking up the taxes on everything under the sun. Being a bit more reasonable I was able, like last year, to push the budget bust date into the indefinite future and achieve the goals of increasing national security, cutting government waste, and becoming energy independent.

Besides changing the starting numbers for the federal government fiscal situation the game was also updated to include new priorities to pursue (at least my memory tells me that “Health and Wellness” and “Economic Stimulus” are new since last year). I decided to see if it was even possible to increase national security, reduce government waste, and promote health and wellness simultaneously. It took more work than achieving energy independence and it was absolutely necessary to pass the Cap and Tax to get it done, but I was able achieve these goals.

It should be noted that I only achieved a very modest reduction in the deficit with these goals and I barely managed to earn the “Efficient Government” badge when trying to also get “Health and Wellness” but I did figure it out. I am absolutely confident that if the game were to allow players to choose 4 goals rather than 3 it would be impossible to get “Health and Wellness” and “Energy Independence” while still increasing national security and making government more efficient – something would have to give. (There are other sets of four badges that could probably be accomplished simultaneously.)

Tags archives, economics, fiscal restraint, government

National

Future Amendment – Fiscal Discipline

Post author By David
Post date September 9, 2009
2 Comments on Future Amendment – Fiscal Discipline

I believe I have been very clear about what I think of the 16th Amendment. For anyone who wasn’t sure – I think it should go the way of the 18th Amendment and be repealed. Not long ago I found a group that feels the same way and is pushing for the 28th amendment to do just that. Their website does not give their proposed amendment a prominent a place as it deserves so I will copy their proposal here.

Section 1. The 16th Amendment to the Constitution of the United States is hereby repealed.

Section 2. Congress may collect no revenue by any means other than a flat individual income tax not to exceed 15% of an individual’s earnings, a flat corporate tax not to exceed 10% of net revenues, and actual user fees for services. All citizens and businesses shall be taxed at the same rate, and no exceptions, exemptions or credits will be allowed.

Section 3.

A. Any budget passed by the Congress must be funded by actual revenues collected through taxes as described in Section 2. Except in time of War as defined below, no deficit spending, borrowing on future funds, borrowing from other entities or other mechanism to meet budget requirements will be allowed.

B. For purposes of this section, “War” shall be defined as hostilities declared by the President of the United States in his Constitutional role as Commander-in-Chief, and duly authorized by the Congress under the terms of the “War Powers Act” of 1973. Any funds borrowed shall be used exclusively for executing that War and shall be re-paid entirely no later than 15 years from the end of the War.

Section 4. All agencies, programs, entitlements and other devices that will be excised by budgetary requirements will be returned to the responsibility of the individual States. No federal regulations or legislation will dictate how the States fund or execute such devices.

Section 5. The Congress may not make State eligibility for redistribution of revenue contingent on compliance with regulations or legislation that has the effect of a nationally uniform standard.

Section 6. Those areas of federal responsibility prescribed by the original Constitution will have budgetary priority. No bill will be passed that funds any other concern without first meeting the budgetary requirements of these areas. No funding will be included in the budget for a concern that is the responsibility of and reserved to the States.

Section 7. Article I, Section 8, Clause 3 of the United States Constitution is hereby amended to read as follows: “To regulate commerce with foreign nations and with the Indian tribes”

This proposed amendment solves a number of problems that currently plague our approach to government spending. The first two sections remove the sixteenth amendment and replace it with an income tax that is limited to 15% on individual incomes and 10% of corporate profits with no deductions or credits. I’m sure the intent of those rates is to be somewhat close to budget neutral. Although I would like to see budget reductions I think a constitutional limit on income tax rates is a positive step.

The third section stipulates that we not engage in deficit spending except in time of war. Section 3(B) defines war – although I appreciate the mandate that war debts be repaid within 15 years of the end of the war I see two problems with this section: first and most importantly, the President is not authorized to declare war (their definition of war should require that war be defined as conflicts that have been declared by Congress); second, requiring funds to be repaid within a set time after the end of a war would be a disincentive to acknowledge the completion of the conflict (it would be far better to require deficit war spending to be repaid within a set time after the beginning of the war – that would encourage the ending of conflicts both to hold down costs, and to allow for the repayment in a timely manner rather than delaying the date when repayment was required by keeping the “war” open).

Sections 4 and 5 help to restore state sovereignty in the use of their funds consistent with the 10th amendment. In Section 6 I would strike the word “original” as it may be necessary at some time to fund something through the government that was not included in the original Constitution.

Section 7 narrows the much abused commerce clause so that the government no longer has any excuse to regulate what I choose to pay my neighbor for mowing my lawn simply because he purchased gasoline that had been shipped across state lines.

Overall I think this a good proposal to remind people inside and outside government that Congress was not intended to babysit every aspect of society and commerce in the nation. It’s sad that such a reaffirmation would have to be written into the Constitution – but evidence suggests that it does need to be reaffirmed legally in that document.

Tags amendments, Constitution, fiscal restraint, future, taxes

National

An Unbiased Perspective

Admittedly I am a person who does not believe that anyone is unbiased – and I’m fine with that. The closest a person comes to unbiased is when they can state a position which contradicts their biases or while acknowledging how that position does not support their biases. When President Obama said that $100 Million here and there eventually adds up to real money in Washington I could not help but notice when Paul Krugman – not exactly the strongest proponent of smaller government – disagreed. He calculated that $100 million per day for an entire four year term would only be 2% of one year’s budget. His conclusion was perfect:

OK, politics is theater. But you could argue that the president shouldn’t feed the bogus claim that we can close fiscal gaps by eliminating a bit of waste.

Tags fiscal restraint, money, New York Times, Obama

National

Half Truths

Regardless of what political agenda is being pushed I hate to see people speak or perpetuate half truths. I try very hard not to do that myself. Today I would like to tell the story of two half truths.

The second half truth is the declaration by President Obama that he intends to cut the deficit in half by the end of his first term. His declaration is coupled with him reminding us of a half truth that President Bush put forward throughout his presidency – namely the fact that his military expenditures were largely left out of the regular budgeting process – relying instead on supplemental appropriations to cover the large gaps in funding the massive military missions. This declaration is made as an attempt to hide the fact that he is proposing record deficits for his entire term and there is nothing to suggest that he will ever propose anything approaching a balanced budget even if he serves two full terms.

In response to Obama’s half-truth many Republicans are perpetuating the first half-truth by sharing the following graph (or some similar variation):

Obama Budget

If we were to admit the full truth the graph would look more like this graph (which I created based on the best information I could find online without excessive research):

Obama Budget

Looking at the complete picture we see that the Bush fiscal record is 1) incomplete and 2) abused the budgetary process to obscure the financial cost of our military engagements. We also see another myth being put forward, that the extraordinary 2009 budget is attributed to Obama. The truth is that Obama took office 7 months into FY2009 and the bulk of that budget was spent by the Bush administration. On the other side, we see that Obama inflated the FY2009 budget by including the appropriations that Bush would have acquired through supplemental appropriations and by frontloading some of his new priorities so that he could claim to cut the deficit in half while running deficits that are larger than anything seen during the Bush administration.

I am convinced that any good goal has as much chance of succeeding while acknowledging the full truth than it has when only presenting half the truth. am also convinced that while both parties have been outrageously fiscally irresponsible the democratic party is even more bold about pretending that we can put that fiscal responsibility on the shoulders of generations unborn.

Tags 2009, Bush, fiscal restraint, Obama, parties

National

A Budgetary Hat-Trick

Jason shared a link to Budget Hero and I had to go take a look. If the game is to be believed, all is not yet lost in the quest to get a balanced budget without abandoning all vestiges of the social safety net that we have been spinning for the last 80 years.

I managed – with a little effort – to balance the budget, increase security, achieve energy independence, and eliminate government waste at the same time so that the budget bust date was pushed back from 2033 to sometime after 2070. I don’t know how accurate the game’s assumptions are, but it really gets you thinking.

Go see if you can achieve your goals (you get to pick your own goals) as a budget hero.

Tags connections, economics, fiscal restraint, government, taxes

National

Amateur vs Professional

The financial amateurs in Congress have given us the 110 page text of their bailout plan which they will probably vote on today. It’s pretty much like the 102 page draft I wrote about on Saturday. They added the option to insure troubled assets in addition to the option to buy such assets. They also settled on the Graduated Authority to Purchase version rather than a straight-up $700B gift. I’m not sure if this is new, but there is also an option to remove the mark-to-market rules in the latest version.

The financial professionals such as Ross Perot have outlined a much better plan at perotcharts.com. Their plan in the immediate term calls for:

Modification or removal of mark-to-market
A 120 moratorium on foreclosures and dividend payments by banks
Higher national standards for capital bases at banks with the Treasury able to buy equity in those banks who cannot raise equity to meet the standard
Raising the FDIC guarantee from $100,000 to $250,000
Using any profits from equity that the government does buy to strengthen Social Security
An independent oversight board for the plan
Criminal investigations into the causes of the crisis

Later they would fix the Glass-Stegall Act, amend bankruptcy regulations, and give HUD/Fannie Mae/Freddie Mac the authority to work with individual homeowners facing foreclosure.

It’s too bad our amateur decision makers are so busy listening to the vested-interests rather than the independent professionals.

Tags bailout, economics, fiscal restraint, money

National

Economics 101 (Bush Edition)

Post author By David
Post date September 25, 2008
6 Comments on Economics 101 (Bush Edition)

Wasn’t it so nice for our president to give the country a lesson in economics. He worked hard to reinforce the image of Washington knows best. Unfortunately his lesson left out a few details that are less than flattering for Washington. Let’s review the text of his speech. I’ll skip all the real fluff and focus on those parts of the speech that need correction.

This large influx of money to U.S. banks and financial institutions, along with low interest rates, made it easier for Americans to get credit. These developments allowed more families to borrow money for cars, and homes, and college tuition, some for the first time.

It’s nice to cite the "large influx of money" but the real problem was "{artificially} low interest rates" that were being managed by the Federal Reserve Board. These are what allowed for people to get credit too easily to buy cars and houses that they often had no business buying – certainly not at the inflated prices that tend to follow easy credit. And lets not kid ourselves, loans for college tuition are an inconsequential fraction of this problem but citing them makes it harder to argue against all that easy credit in the first place.

Easy credit, combined with the faulty brainless assumption that home values would continue to rise, led to excesses and bad decisions. (corrections in italics)

The following statement is almost entirely true and when we insert the one final bit of truth it is very damning to the idea of government intervention.

Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac.

Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk. (emphasis added)

The one bit of untruth there was the implication that people were wrong to believe that Fannie and Freddie were guaranteed by the government. When push came to shove, the government stepped in and guaranteed both entities. Even if it had not, it was the perception of such a guarantee that allowed those companies to "put our financial system at risk."

The market is not functioning properly. There has been a widespread loss of confidence, and major sectors of America’s financial system are at risk of shutting down.

If the market is allowed to correct itself those sectors would shut down and restart, like a computer reboot. Though the process would be painful in the short term, the problems would be corrected much faster than if we insist on picking our way down the face of the cliff.

Perhaps we should take note of the fact that our government has been actively assisting the market for 7 years allowing the housing market to artificially expand our economy during a time when we should have allowed for a market correction following the Tech bubble and the shock of 9/11. Now the problem is worse than it was which gives us more excuse to pursue the same course with more drastic measures.

Without $700 Billion worth of intervention, Bush predicts:

Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And, ultimately, our country could experience a long and painful recession.

In a free market individuals and businesses would be learning to deal with the difficulties of tighter credit by living within their means, but "We must not let that happen." Because our market has been manipulated with artificially low interest rates and other such "minor" interventions the true value of a new car or a college education has become distorted. I note that Bush did not list buying a house as something that would be more difficult, I’m sure that’s because reckless home buying on easy credit is a visible part of the problem.

Lest we forget our recent history, while we have not had a serious recession (which would generally last less than 12 months) our last 84 months (at least) have been filled with news of job losses and anemic economic growth. We credited the rise of home prices with what little growth we saw and blamed the war, outsourcing, and illegal immigrants in turn for the lack of real growth.

Now we are seeing the one positive thing we saw as the primary cause of our current predicament – and yet we fail to realize that the reason for our unnatural 84 month see-saw is government intervention in the markets. Ultimately we have experienced a long and painful open wound which is now infected which was caused by our attempts to avoid the surgery of a natural market correction.

The president paints a rosy picture of how the proposed intervention would function, but the fact is that the proposal so far lacks any structure to guarantee anything like the picture we are being sold.

I liked the reference to the FDIC:

And through the FDIC, every savings account, checking account, and certificate of deposit is insured by the federal government for up to $100,000.

The FDIC has been in existence for 75 years, and no one has ever lost a penny on an insured deposit, and this will not change.

In order to avoid some panic, let’s remind ourselves that the above statement is true, those accounts which are based on actual cash value are safe so far, and safely insured by the government already. With that safety net, we should take our chances with Wall Street and let the government bail out the savings of those who lose money if their local banks ever fail.

Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised.

It has unleashed the talents and the productivity and entrepreneurial spirit of our citizens. It has once made this country the best place in the world to invest and do business. And it gives gave our economy the flexibility and resilience to absorb shocks, adjust, and bounce back. (corrections in italics)

Since then we have decided that we want to unleash the entrepreneurial spirit without having to absorb shocks and adjust. Good luck with that plan.

Tags bailout, Bush, economics, fiscal restraint, money

National

We Must Do Better

There has been no shortage of opposition to the hastily proposed $700 Billion Gift Card (Chris Suellentrop provides a nice rundown) – unfortunately little of the real opposition comes from members of Congress. Our own Senator Bennett has flipped from being wary to being supportive because, as every elected official knows, foolish action is better than rational inaction where re-election is concerned.

We are lucky right now to have a divided government – at least there is an initial reaction of shock from the Democrats at the lack of thought that has gone into the initial proposal. Democrats want to add in a few more dubious provisions, but at least they also want to provide some oversight in the process as well. The Republican leadership does not want any delay:

"When there’s a fire in your kitchen threatening to burn down your home, you don’t want someone stopping the firefighters on the way and demanding they hand out smoke detectors first or lecturing you about the hazards of keeping paint in the basement," Senator Mitch McConnell of Kentucky, the Republican leader, said in a speech on the Senate floor. "You want them to put out the fire before it burns down your home and everything you’ve saved for your whole life."

That analogy fits the goals of the administrations and their MO but it misses the actual situation. The truth is that a few houses have already burned down and others are smoldering in the neighborhood. In response, this fire department is proposing to break the dam above the town to quickly douse the neighborhood without considering the extra flood damage that may result and the fact that their action could weaken or destroy properties that are not currently in danger. They are so busy trying to look heroic by taking drastic action that they have failed to consider any minimal rational restraint in their proposal.

For those who are not afflicted by D.C. Myopia, the holes in the plan are gaping (Jay Evensen and Jason Linkins) and there are many better options being presented in short order. Paul Krugman astutely asks:

The premise of the Paulson plan– though never stated bluntly — is that these assets are hugely underpriced, so that Uncle Sam can buy them at prices that help the financial industry a lot, without big losses for taxpayers. Are you prepared to bet $700 billion on that premise?

I’m not – I wouldn’t bet $10 on that.

Sebastian Mallaby is generous enough to illustrate two alternative proposals by academics that carry lower risks and higher potential returns for taxpayers.

Within hours of the Treasury announcement Friday, economists had proposed preferable alternatives. Their core insight is that it is better to boost the banking system by increasing its capital than by reducing its loans. Given a fatter capital cushion, banks would have time to dispose of the bad loans in an orderly fashion. Taxpayers would be spared the experience of wandering into a bad-loan bazaar and being ripped off by every merchant.

Raghuram Rajan and Luigi Zingales of the University of Chicago suggest ways to force the banks to raise capital without tapping the taxpayers. First, the government should tell banks to cancel all dividend payments. . . Second, the government should tell all healthy banks to issue new equity. Again, banks resist doing this because they don’t want to signal weakness. . . A government order could cut through these obstacles.

Meanwhile, Charles Calomiris of Columbia University and Douglas Elmendorf of the Brookings Institution have offered versions of another idea. The government should help not by buying banks’ bad loans but by buying equity stakes in the banks themselves. Whereas it’s horribly complicated to value bad loans, banks have share prices you can look up in seconds . . . The share prices of banks that recovered would rise, compensating taxpayers for losses on their stakes in the banks that eventually went under.

Mallaby also points out the difference between the Paulson Proposal and the Resolution Trust Corporation that it might be compared to:

The RTC collected and eventually sold off loans made by thrifts that had gone bust. The administration proposes to buy up bad loans before the lenders go bust. This difference raises several questions.

The first is whether the bailout is necessary. In 1989, there was no choice. The federal government insured the thrifts, so when they failed, the feds were left holding their loans; the RTC’s job was simply to get rid of them. But in buying bad loans before banks fail, the Bush administration would be signing up for a financial war of choice.

Despite the widespread opposition to this knee-jerk reaction in Washington (I’ve only linked to 5 examples) I fear that the bill that gets passed all too quickly will look almost exactly like the one Secetary Paulson proposed. I think government is the only institution that can consistently be efficient where they should be deliberative and inefficient in all other things.

Please take the time to contact your Congressional representatives to encourage them to slow down on this and avoid a few of the gaping potholes before them.

Tags bailout, change congress, Deseret News, economics, fiscal restraint, government, New York Times, Salt Lake Tribune

National

A Managed Economy

I try not to focus on political or economic issues on Sunday, but I had a hard time when I noticed the figure "$700 Billion" yesterday. I was particularly worried by this statement:

. . . it would allow Treasury to act unilaterally: Its decisions could not be reviewed by any court or administrative body and, once the emergency legislation was approved, the administration could raise the $700 billion through government borrowing and would not be subject to Congress’ traditional power of the purse. . .

”It essentially creates an economic czar with no administrative oversight, no legal review, no legislative review. And it gives one man $700 billion to disperse as he needs fit,” said Sen. Dianne Feinstein, D-Calif., referring to Treasury Secretary Henry M. Paulson Jr.

”He will have complete, unbridled authority subject to no law,” she said.

In an administration that is already known for stretching its authority I have long had some fear of the consequences of the War on Terror. After this I am equally worried about the consequences of the War on Economic Uncertainty if this measure passes as submitted.

Thankfully the Democratic congress is pushing back on some aspects of the plan such as the lack of oversight.

Democrats want the measure to include independent oversight, homeowner protections and limits on executive compensation, House Speaker Nancy Pelosi, D-Calif., said in a statement early Sunday evening.

"We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome," she said.

While I historically agree with the Republican party more often than the Democratic party on economic issues, I very much side with the Democrats on this one (if I’m forced to choose one of those two positions). We must have a healthy system of checks and balances between branches of the government. Regardless of the checks that may be imposed by Congress, anyone who still argues that we have a free market is either lying or ignorant.

I saw much more encouraging news this morning:

Goldman Sachs and Morgan Stanley, the last two independent investment banks on Wall Street, will transform themselves into bank holding companies subject to far greater regulation, the Federal Reserve said Sunday night.

The firms requested the change themselves . . .

(emphasis added)

This is how a free market is supposed to work. The individual companies recognize their precarious position and make changes themselves. Only the threat of failure will cause them to do this. Having the safety-net of a bailout available only encourages more risky practices. What is really interesting to me about this move is that it essentially reverses a "protective measure" that was passed in the Great Depression. Apparently that intervention in the market helped to facilitate our latest economic shock.

By the way, the plan includes a provision to raise the debt limit from $10.6 Trillion to $11.3 Trillion. What good is it to have a limit if those who are "limited" are allowed to move the goalposts at will?

Tags bailout, checks and balances, economics, fiscal restraint, government, national debt, Salt Lake Tribune

culture National

And Now For Some Good News . . .

Post author By David
Post date September 19, 2008
2 Comments on And Now For Some Good News . . .

I’m sure there are many who would not see this as good news, but when I read about contracting credit in the lives of everyday people I was thrilled. Because I expect that many people would not share my positive outlook at this news, let me share why I think this is a good thing for our country.

Brad Rock is the chairman of the Smithtown bank and also chairman of the American Bankers Association. According to the article he views the situation with a similarly positive perspective as I do.

“With marginal lenders in trouble, we have more people than ever coming to us for loans,” said Brad Rock. “So all of a sudden, we can be much pickier in deciding what loans to make and how much to lend. . .

“Now people are going to actually have to have a job to get a loan and they are going to have to make installment payments that are already higher per dollar borrowed than they used to be,” he said, arguing that the debt-fueled prosperity of the bubble years was unsustainable.

The real cause of this crisis is not simply that bankers on Wall Street got greedy, it is that so many of us have become greedy as well. We insist on taking the largest loans we can get and living as far out over the edge of our incomes as possible.

The winners so far are the Brad Rocks of America, the bankers who have emerged unscathed, their capital intact and with enough retained earnings to support lending, on their terms. A residential mortgage from Bank of Smithtown requires 20 percent down and clear evidence of adequate income to repay the loan, as well as a good record of paying down debt. . .

“Now many of these lenders are gone,” Mr. Rock said, “and the small-business borrowers are coming to us, and we are doing good old-fashioned underwriting, and the result is that fewer people are getting loans.”

I see no evidence that the Bank of Smithtown has made substantial changes to their practices. What they are doing now, holding borrowers to higher standards, is the same thing they were doing before when it was easier for many people to get a loan elsewhere. They survived the boom times while playing it smart and now they are thriving in the bust because they stuck to sound practices when so many others were taking risks.

The article is focused on businesses thriving who played it safe, but the same is generally true of individuals. American Express may be lowering the credit limits of half their customers, but they are also raising the credit limits on the other half. Those who have exercised discipline in their spending habits when credit was easy to come by are the least likely to feel a credit crunch now.

I do not mean to suggest that there are not casualties to this credit crunch, but I am confident that the benefits of a nation where people are more aware of the need for wise financial decisions and less prone to living beyond their means outweigh the losses of good people who are having a hard time getting started (which, I suspect, account for the largest portion of those who are feeling the crunch through no fault of their own).

Tags economics, fiscal restraint, money