Balance the Budget?

By Dr. Harold A. Black

blackh@knoxfocus.com

haroldblackphd.com

In Washington, balancing the budget is a game with the Republicans pretending that they want to cut spending while the Democrats act as if any cut will be devastating. The farce is repeated every year with the result of ever-increasing spending and deficits. Neither side is serious about fiscal responsibility. Balancing the budget is impossible in the short run. Given the political realities, the only solution is economic growth. However, burdensome regulations, measures that discourage small businesses and barriers to free trade hinder growth. Nevertheless, it is easier to grow the economy than for our politicians to cut spending or even cut the rate of growth in spending. The traditional way of thinking is that a budget is balanced either by decreasing spending or increasing taxes or both. For our politicians cutting spending is virtually impossible leaving increasing taxes as their only choice. Yet increasing taxes will only make things worse. The increase in taxes necessary to balance the budget will slow down economic growth, crash the economy and slow down revenues to the government.

The budget is made up of two major components, nondiscretionary spending and discretionary spending. Federal nondiscretionary spending includes mainly social security, Medicare and federal retirement benefits. In the past fiscal year, nondiscretionary spending was $4.1 trillion. Discretionary spending was $1.7 trillion. Tax revenues were $4.9 trillion. The interest on the national debt was $724 billion This leaves only $76 billion to spend on everything else.

Of course, nondiscretionary spending is nondiscretionary because the government says it is. We all know that social security is considered sacrosanct and politicians are afraid to alter it. The same is true of Medicare. But the increase in both must either be corralled or the economy liberated to grow in order to achieve a sane fiscal policy. The economic literature offers evidence that increases in government spending lead to a reduction in private investment and economic growth. This is the classic “crowding out” effect. This is in contrast to where most politicians think that government spending stimulates economic growth. Yet the evidence is otherwise. Research also shows that regulations create burdens that slow economic growth and that regulatory reform unleashes economic growth.

Reforming the tax code and eliminating regulatory burdens would stimulate the economy. The overly complicated US tax code creates over $1 trillion in costs to the economy. Moreover, the cost of compliance to business has been estimated to be over $2 trillion. The Federal Register which is a measure of an administration’s regulatory actions increased by 80,756 in 2022. Much of these regulations are nonessential. It is just Big Brother looking over the shoulders of businesses. Burdensome regulations are especially a drag on small businesses that cannot afford the compliance experts of big businesses and small businesses are the growth engine of the economy. Yet even for big business, the salaries and benefits of compliance personnel, accountants and attorneys are a net loss. Compliance does not add to the bottom line. I once had a minority banker tell me that the cost of complying with all the fair lending regulations had so adversely affected his bottom line that he was going to have to sell his bank to a large regional bank. In the past, small bankers have asked for regulatory relief but to no avail. The Consumer Financial Protection Bureau is not the friend of small financial institutions and in many cases, actively tries to put them out of business.

So I offer a few real solutions of my own.

1. Eliminate duplication in government.
2. Eliminate automatic escalators in nondiscretionary items.
3. Raise the full benefit age in social security to 70.
4. Privatize Medicare and Medicaid.
5. Privatize social security with a benefit floor guaranteed by the federal government.
6. Eliminate the federal income tax and institute a flat income tax with no exemptions.
7. Limit the annual growth in the number of pages in the federal register.
8. Institute a sunset provision for all regulations by all federal agencies.
9. Mandate that regulatory burdens must be reduced by at least 5 percent per year.
10. Limit federal pay (including perks) to no more than 10 percent over the average pay for the same position in the private sector.
11. Eliminate the Departments of Education, Energy, Commerce, Interior, Agriculture, Labor and Transportation.
12. Eliminate all specified federal spending to the states and replace them with block grants.
13. Cap the federal budget to 20 percent of the previous year’s GDP.