Government Spending

When my father in law was here last, we had a good conversation about government spending.  A few days after, as I drove home from school, I threw on one of the recent NPR Planet Money Podcasts which told me that they were now going to devote a lot of time and attention in future podcasts to the topic of government spending, and would be looking to listeners to come up with ways to cut the federal budget.

It was an awesome podcast.  Here is the link to listen (it’s about 15 min):

Here were my take aways:

  • Annual budget – 3 trillion dollars.
  • Deficit for this year – 1 trillion dollars – gotta cut the budget by a third to balance it.
  • Annual “discretionary” budget is 1/3 of total budget (roughly 1 trillion).  This is money we can choose to spend or not spend in a given year – it is the run rate of the government.
  • Annual “entitlement” budget is 2/3 of budget (roughly 2 trillion).  This is money we are required by law to spend, whether we want to or not.  Changing this spend requires new legislation, and the breaking of ‘promises’ to someone.
  • Defense spending makes up more than half of the discretionary budget, totally 600 billion.

I know that everyone has their take on what the government should be cutting.  I had mine as well.

I think, though, if you were the CEO of the government, you’d have to take in the following considerations:

  • Since payroll makes up the lion’s share of any organization’s spending, any significant cuts will mean a loss of jobs, thus increasing the over 9% unemployment rate.  This is an economically untenable position right now.  Cuts in government jobs would be perceived as a weakness of faith in the government which would have ripple effects through the entire economy, and would surely drive another, possibly deeper, recession.
  • Cutting benefit programs now seems like a poor solution, especially as a short term solution.  Long term cuts in benefit promises are needed to balance the budget (especially if we want to keep taxes low), but short term benefit cuts would hurt the unemployed, disabled, and elderly the worst – the most vulnerable of our population in this down economy.  In fact, congress keeps voting to extend unemployment benefits to help people get through this very difficult recession.
  • I admit that raising taxes could slow the economic recovery, as people may invest less in the economy if they are nervous about taxes going up.

Given these three options, I think the only thing you can do right now is end the temporary tax cuts for the wealthiest Americans.  I actually think this is our only opportunity for a more fiscally sound government right now.  Why?

First, the uber-wealthy do not use their personal money to create jobs.  They primarily use it to create more wealth, and not always in the most healthy ways.  This kind of speculation is what drove the bubbles we have experienced.  People using money, not as an investment, but as a club or a lever.

For example, there is an ‘activist’ investor who just did a hostile takeover of 20-something% of JCPenney’s stock.  His goal?  They’re not sure yet, but some supect it is to force the board to spin off the real estate of the company and make short-term changes that will drive the stock price up by only a few dollars, making him MILLIONS in the short term, but putting the company in a bad position long term.  This does not add to JCPenney’s long term financial soundness.  This does not add jobs to JCPenney.  This generates short-term profits for him.

My feeling is that if this guy has millions of dollars sitting around to mess with a company, he can certainly afford to pay a 20% tax rate, as opposed to the 10-15% he is paying now.

Now, your definition of “wealthy” may vary.  I personally know some who make $250,000 a year don’t feel like they’re that wealthy… I hope to one day be among them.  But if I had to choose between the long-term solvency of our government and whether I could afford the $500,000 house or the $750,000 house, I’d choose to support our government.  After all, it’s the economic environment of our country that enabled all the commerce and wealth generation.  After all, America is still the place to come if you have an idea and want to market it and sell it.

One thought on “Government Spending”

  1. It will be interesting to see what happens with Britian and their efforts to stick to the budget.
    We can’t really compare apples to apples with them since they can’t get Chinese loans like we can –
    but I admire their ability to do something! Everyone including the royal family is sacrificing to bail
    out the government.

    Unfortunately for us, (and excuse my language) but I don’t think that the US government has the balls to
    do something like this – even if it is necessary for our long term health. Kudos to Britain. But then again, no one knows for sure that Britian will really benefit from these cuts (as some are sceptical)

    One problem with your analogy though is that if the government were a corporation, the board would not have
    any problems approving lay-offs in times like this. But the government is not a for-profit corporation so it
    can’t always act the way a capitalistic corporation would.

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