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On balancing the federal budget ….

Cutting the budgetAs much as we all may distrust the 536 folks charged with setting policy, there are rational agenda-free offices within the government doing a bang up job and quietly making interesting though potentially controversial suggestions on fixing the very institutions they work for. More on these folks later.

Our sputtering economy is tops on everyone’s minds these days. And I applaud both the Tea Party and the Occupy Wall Street movements for venting their frustrations. This is America; this is a country built upon the premise that everyone has a voice. The problem with both movements is that in their frustration they rail against institutions that grant these rights and freedoms and their stridency while applaudable is not built upon promoting actionable solutions. Instead they are founded on the premise that that which they find objectionable must be torn down or removed. The government just can’t stop spending money tomorrow. Wall Street can’t stop working tomorrow or pull all paychecks. It’s not black and white, it’s 256 shades of gray. And it’s in recognizing and solving for gray that real workable solutions can be achieved.

Let’s face it, whether we like it or not, we’re all (well, maybe almost all) in this together and there are always workable solutions. This is a country that came of age and became a world leader because we were more industrious, more clever. We threw caution to the wind and came up with better more effective solutions. The time is ripe for being clever again. The time is ripe for making tough decisions and leading again by example. There is no better way to lead than by putting your money where your mouth is.Lincoln Memorial under construction

Let’s take the deficit and our debt issue…..

At some point in time the great majority of us have been in the uncomfortable situation of overwhelming debt. Even Donald Trump jokingly talks of the time when he was billions of dollars in debt and he passed a homeless guy in the streets thinking “This guy is in better financial shape than I am”. Now that didn’t stop the Donald from driving around in limos and paying for that hairdo. But still at one time or another many of us have known the feeling.

And those of us who have managed to extricate ourselves from that seemingly impossible debt hurdle all know 2 simple truths:

  1. Start looking for ways to creatively cut expenses
  2. Look for ways to bring in more money (new job, 2nd job, etc.)

You cut here, you cut there. Eventually you get to a point in which you break even and are no longer living beyond your means. Excellent! A balanced budget (That, my friends is solving the deficit problem). But as we all know that’s only a quarter of the battle. There’s still the issue of the debt that’s mounted up. That still needs to get paid off and while it sits out there, it’s growing due to interest. So paying off the debt has to become one of the non-discretionary expenses -as loathsome as it may seem- that needs to be accounted for. This my friends is solving the debt crisis. Don’t let sound-bite spewing politicians tell you otherwise. They are two separate and distinct issues. Solving one doesn’t equate to solving the other. This second issue is what they refer to as servicing the debt.

Let’s use an example. Let’s suppose I have a job that pays 30,000/year. I net after taxes roughly 20,000. I’ve been living beyond my means and have racked up $30,000 in debt plus maybe school loans or a car loan and suddenly one day I’m looking at say $60,000 in debt. Ouch!! What do I do?

First, I have to reduce my partying, probably find a cheaper apartment, cut out/reduce restaurants and going out for lunch. Maybe I start making my own lunches, take a big jug of coffee to work instead of buying that latte. Maybe cut back on the premium channels on cable TV. There are lots of discretionary expenses we’ve taken for granted these days. We pay for lots of things our parents never had to pay for — TV, cellphones, internet, and the like. Point is, I start reducing my costs. I don’t stop spending completely because realistically, I can’t. I have to pay for a roof over my head, I have to pay for transportation to and from work, I need food. I need the basics and I need to take a harsh look at what I spend money on. The pork days are over … for the moment.

Second, it definitely behooves me to start looking for ways to bring home more bacon. A new job, a second job, odd jobs, whatever it takes.

At some point I get to the stage of breaking even. I have a balanced budget! But I still have to pay off the $100,000. So I need to keep cutting until I get to a point where I’m spending $5,000 less than I’m bringing in. Now I can put that $5000 against the debt. Great! But that leaves me with 20 years for payments which really doesn’t equate to a happy life. It’s definitely time to start looking for new money. Or cheaper money. Maybe I have $60,000 credit card debt that has a 15% interest rate and I can fold it into a home equity at 4%. That’s savings of $6600 a year. A new job, a second job, anything to help reduce the debt to something more manageable. I understand that in this economy it’s definitely easier said than done.

I provide the previous example because many of us chose not to go out and rob a bank and instead went down this route and eventually saw our way out of debt or we’ve at least gotten to a point in which the debt may still there but it’s manageable.

So why can’t Congress figure this out??

Back to my opening comment about sane minds in government doing the jobs they were paid to do. One such group is the Congressional Budget Office. They don’t have an agenda. They are the government’s bean counters. They are the number crunchers who will assess spending plans and calculate for you the various outcomes.

1. Start looking for ways to creatively cut expenses

On their website is a link called Reducing the Deficit: Spending and Revenue Options. There you will find a document rife with options for reducing both discretionary and non-discretionary spending. Implementing their options would be painful but not impractical. They attack our Option 1: look for ways to spend less. Some of this is accounting maneuvers, a lot of this is practical ways to reduce spending commitments. All of it is meaningful ways to reducing the government’s propensity to spend like a sailor.

2. Look for ways to bring in more money (new job, 2nd job, etc.)

Falling moneyOkay, the government can’t find a new job (Boy, wouldn’t that be nice!), but it can try to collect more money. And, yes, much as I hate to say it, that means raising taxes. I hate the idea but I’m not opposed to taxing those making over one or more millions of dollars a year. I disagree with those who say this would unfairly tax those who provide jobs and would in all likelihood drive them out of business and increase the unemployment rate. First, most people in America are employed in small to medium-sized businesses. Most of those owners are not skimming millions from the top to enrich themselves. On the contrary, the good businessmen, the smart owners are pumping most of their profits back into the company to grow the business. You can’t just keep taking money out. You’ll bankrupt the company. Some may use company money for vacations that double as business trips. Hey, these are -in the main- private companies so if it works, I’m okay with it. Public companies, on the other hand, must abide by certain regulations and are accountable to the shareholders so they can’t enrich themselves quite so obviously.

But back to the point, most of these business owners expect a payout when they sell the company or go public. That’s their exit strategy. When that happens, yes, there are opportunities to take home some considerable cash but more often than not, the big payout comes in the form of stock and stock options. This is the way the really rich get rich: with stock. And when they sell the stock, they pay a capital gains tax on the money, not regular income tax.

So … those who are enriching themselves with large cash payouts annually should pay a slightly higher rate. The slightly higher tax rate won’t sound the death knell for their life style; the higher tax rate won’t mean the shuttering of many a small and medium sized business. The more likely unintended consequence will likely be the slowing down of huge bonuses and the increase in stock options (some call it putting skin in the game; others call it golden handcuffs).

In the short run at least it does mean that the government will have to increase its revenue (read: raise taxes). But … that leads to the last point:

3. (For governments only) Learn how to do with less

While we have the luxury of finding and taking a new job (some might call it a luxury, others might see it as a lifestyle upheaval involving moving, finding new schools for kids, making new friends, etc.), the government can’t do this. But the government and those 536 who set policy and decide how to spend revenues must come to grips with setting reasonable spending limits year to year.

Government spending shouldn’t outpace cost of living, except in times of emergency and / or dire need [like now]. Government spending should reflect the country’s relative affluence of or lack thereof. Government spending should be much smarter. I will leave for another day what constitutes smart spending but let it be said that with a budget in the trillions there is easily 15-20% wasteful and wrong-headed spending. The system as it is set up is all about entitlement spending. We send representatives to Congress in the hopes that they will fight for our local communities and bless us with money from the government to pay for programs we don’t want to pay for. Or -worse- pay us to accept mandated programs that go beyond intelligent governance.

That’s my two cents ….


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