I printed out and scored the 37 ‘cost’ accounts in the 2009 GAO ‘United States Government Financial Statement’. I’ve included the link for the full financial report at bottom of this blog. If you read the section ‘Management’s Discussions and Analysis’, it paints a dire future of a government out of control and unsustainable. Minor adjustments on growth and the political bickering doesn’t help. A major structural change has to happen. Here we go…..
The bottom line is, of the 37 cost accounts on page 45 only 15 can be justified as legitmate Federal powers under the original intent of the US Constitution. Which means of the $3.7 trillion in Gross Costs, only $1.5 trillion is legitimate. The Revenues for 2009 were roughly $2.4 trillion which means the federal operating loss for 2009 was $1.3 trillion which is added to the national debt each year – $14.7 trillion at this writing.
Now I did this quickly on a napkin, but if we cut 37% of federal spending we would have a balanced budget and not add to our national debt. If we also tagged the unconstitutional spending accounts (department of education, medicare, energy, housing, etc) and put a timer on them for phase out (5-10 years), it would leave time for the states to decide individually which, if any they’d want to take on. The remaining 15 accounts (department of defense, justice, etc) are engorged and while the initial across the board cuts will go a long way, we also could look at privatizing some of the remaining departments or outsourcing some of their services.
While 37% is a severe cut in one year we could phase it in over a short period of time as well. Calvin Coolidge cut over 20% coming out of a depression in the early 1920s. The risk though, is not getting meaningful cuts through so I’d start at 37%. Also, the federal employees who are laid off would receive a severance package of wages and benefits for a period of time ranging 6 months to a year based on years of service.
Social Security, because it’s unconstitutional, should also be treated as the programs tagged above and phased out. The states can decide whether they want to institute a retirement program, if their charters allow. The phase out approach we would take would be similar to the approach private industry took in the late 1980s-1990s as they transitioned from Defined Benefit plans over to Defined Contribution plans. Those already in retirement would see no change, and we’d choose private managers and actuaries to keep the plan fully funded each year. We’d decide on a cut off age (50, 55?) and those below that age could receive a choice of a rollover into an IRA or cash payout of the actuarial value of their contributions and establish their own retirement accounts, or find a state that wishes to take on a retirement plan. Those over the cutoff would have same choices as those below cutoff age and in addition, they’d have the option to join those in retirement where the funds would be managed privately and would behave similarly to the existing social security system which is a Defined Benefit plan. Overtime, the federal obligation would diminish and be phased out.
The surplus from the cuts in spending and elimination of more than 50% of federal programs would leave enough room for substantial cuts in taxes and enough tax revenue to cover much lower spending commitments (that are constitutional) and a debt retirement schedule. The effects in substantial cuts in federal taxes on individuals, corporations, estates and trusts, would have a stimulative effect on the economy. Consumer Confidences Indexes would boom. Markets would rally.
Also we would reinstate legislation that required any new debt issuance to originate in Congress, which would hamper willy-nilly debt expansion.
Sounds like a ‘pipe dream’? Maybe- but we have to start somewhere and we need dramatic structural and financial changes to our Federal Government. If you have a cursory understanding of basic accounting and you review this report, you can see the magnitude of the problem we are in. Substantial cuts, retiring debt and shifting of power out of DC and back to the States is the answer. It will invigorate our economy because it tells the markets we’re serious, and in the hands of individuals is where capital is created and best utilized.