A Cautious Pro-Growth Approach to Balancing the Budget

Most economists agree that it is necessary to promote new revenue while reducing expenditures. In the area of new revenues we can think about revision of the tax code in a way that reduces net payment of taxes by both individuals and corporations. We should both simplify the code and eliminate or reduce some deductions and loop holes. Realistically a new and simplified tax code with simultaneous attention to fair removal of deductions or loopholes may require 2-3 years. Such a major change will require considerable discussion within the Congress and as always will need to take the public’s views into account. When Reagan did this, it took about 3 years to work it through. While this may take time as noted, the Congress may also be able to reduce or eliminate some subsidies, as well as set up a program for the phased elimination of other subsidies.  There is general agreement that we can improve revenue slowly in this way. In addition, if we establish a pro-growth strategy we can potentially improve revenue in the short term through increased tax collections associated with new jobs that come along with new growth. That will give us time to wait for new revenues from a revised tax code and altered subsidies and loopholes.

Reduction of some expenditures in major budget categories can begin at once, but should begin slowly. There is general agreement that we can cut the defense budget, slowly at first and then more as the military thinks through and establishes a more modernized strategy. Iraq and Afghanistan have wound down and we can likely depend on at least a short term peace dividend. While we are never certain where the next threats will come from, America currently spends more than the next 18-20 countries combined on defense. We can certainly make cuts in short term expenses on defense while the Defense Department modernizes. At the very least we can lower the rate of increase of the defense budget in the short term and probably make more significant cuts going forward.

Entitlement areas of the national budget are, of course, a major concern. We can both begin a form of means testing in both the area of Social Security and Medicare/Medicaid. We can increase payroll deductions for both programs and increase their lifetimes (before bankruptcy), as long as start slowly. By working at improving both the general health of the aging population as well as efficiency and productivity in medical care, we can slowly reduce medical care costs going forward. The Affordable Care Act (aka Obama-care) may or may not produce savings that are intended.

Overall, whatever targete4d savings that are not achieved through Defense & Entitlements most come from reductions in other areas of the budget or from an improved revenue picture which combines tax code revisions, reduced subsidies and loopholes as well as from more taxes collected because more people are working.

In general, if the Congress can make a non-alarmist start and plan at least an approximate staged-direction indicating how planning is intended to gradually close the considerable current distance between revenue and expenditure for, say a ten year period, then if the rest of us believe in the reasonableness of these prognostications, a growth economy will be stimulated and we may make it.

We have to try to balance yearly budgets within 3-5 years, or even perhaps over a longer time frame. The current national debt of about $16 trillion may increase to $17-18 trillion before it starts to decline but that may keep approximate pace with the growth in GNP. If it does, then in the out-years of the decade in front of us we can begin to make modest attempts to pay down that accumulated debt, provided we do not make unwise reductions in the tax burden that should be carried into as least a 25-50 pay down in the accumulated $17-18 trillion debt.

The major difficulty I foresee with such a plan includes consideration of how to deal with (1) the major money printing already done by the Federal Reserve Bank over the last several years to prop up financial markets during the early deflationary years of the financial crisis, (2) a continued over-zealous push by businesses toward automating everything, in effect spending their considerable resources on productivity improvements that do not lead to job creation, (3)  improving America’s energy independence, including transformation away from fossil fuels and toward renewable-energy sources, and (4) creation of an infrastructure renewal program, and finally (5) preservation of water and other key natural resources.

These are issues which I will give further attention in subsequent blog posts.

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