Why a Federal Budget Crisis? Because “They’re Pretty Representative”

“They’re pretty representative” came from Paul Vail, Professor of Economics at Miami University in Oxford, Ohio.  He was commenting on why the public shouldn’t be so dismissive of Congress for its overall perceived incompetence, because representatives actually mirror their constituents — and that was in 1976!  While he wasn’t specifically addressing the federal budget then, his statement about us is still accurate today.

Looking at our federal budget deficit, we wonder incredulously: how did we manage to get into this mess?!  A large part of the problem centers on the misuse of the word “entitlement,” which was discussed in my last article.  [READ “‘Entitlements’ vs. ‘Unearned Outlays’ and Their Impact on the Federal Budget.”] The inability to separate what is truly “entitled” (payments to those who have contributed to the system for years) from “unearned outlays” (payments to help those in need who may not have contributed) cripples the budget negotiation process.

This part of our budget problem can be described as structural.  It’s like a house which has a second story way too big for the first floor – and no stairs to connect them.  It’s unwieldy and doomed.  Such a dilemma should be obvious to all who see.  We can continue to dance around the issue by putting up exterior ladders or landing helicopters on the roof to deliver necessities, etc.  Deep down, however, we know it’s not sustainable.

The other problems hitting the budget process are like termites.  They won’t bring the house down immediately, but they eat away at the structure over time.  When they’re discovered, a lot of damage has occurred.  But just like a homeowner with a termite problem, the federal budget can be fixed if we are willing to overcome the embarrassment of unrealistic promises and remedy it promptly.

[RELATED on OCR: 5-Part Series: Our Coming Economic Collapse]

Who’s at Fault?

As much as we don’t want to admit it, Professor Vail was correct: all of us are.  How can that be?  As retired and renowned neurosurgeon Dr. Benjamin Carson reminds us, we tend to re-elect 90% of incumbents.  Now that is not intrinsically bad, but with regard to our deficit let us remember the definition of “insanity.”1

So, what exactly are these budget termites?

Starting the Road to Fiscal Sanity Requires Responsibility from Everyone

We begin with Ronald Reagan’s comment to Johnny Carson on “The Tonight Show” on March 13, 1975:

“Balancing the budget is like protecting your virtue.  You have to learn how to say ‘no.’”

Therein lies a source of our predicament.  For some of the Baby Boomers and many born later, we have to start with explaining what “your virtue” means.  The outfall of the “liberated 1960s” has embedded the belief that “we can have our cake and eat it, too” in society.  While some of the moral consequences of altered social mores may not have been immediately obvious, the financial penalties aren’t waiting.

Spending  Cuts Must Be Greater Than Tax Increases

Oh sure, many of the “99%” jump on the “we need to tax the wealthy more.”  True, that can be done.  Then after fifty years we would have more Detroits because the tax base has left.  The other problem is that it wouldn’t be enough.  As Chris Wallace said during his Fox News interview of Nancy Pelosi on 2/10/2013,

“If you took the total income of everyone making more than $1 million a year, if you taxed it all, at 100 percent, that’s only $726 billion, which is less than the projected deficit for the year.”

Or we would experience what France is seeing now, as its government implements a policy borne out of President Hollande’s campaign comment that “I don’t like the rich.” Wealth began flowing out of the country after the imposition of an effective tax rate of 75% for incomes greater than €1 million for the next two years.2  The tax was later levied on companies instead after aspects were found to be unconstitutional.  The commentators noted that a Euro millionaire can take home €300,000 more simply by taking the Chunnel to live in London.  They also acknowledged that the French need fundamental changes to their economy.3,4

[RELATED on OCR: Why We Need a Balanced Budget, but NOT a Balanced Budget Amendment]

And so it needs to be with us.  In addition to “unearned outlays,” here are some of the policies which typify the problems of trying to have a balanced budget and are often overlooked:

1) A fun place to start is with the famous tax credits which expired at the beginning of this year.  There are some on that list which are necessary, reasonable or just plain fair (e.g., #29- Accelerated depreciation for business property on an Indian reservation, #42- Tax-free distributions from individual retirement plans for charitable purposes and #17- Employer wage credit for activated military reservists). On the other hand,  we have:

#22- Parity for exclusion from income for employer-provided mass transit and parking benefits.  
This is a good illustration of the federal government trying to fix the injury of injustice, but the culprit escapes.  In 2013, mass-transit riders going to work could set aside up to $245 per month of pre-tax income and drivers the same to offset parking fees.  With this expiration, mass-transit riders’ pre-tax allowance falls back to $130 per month while the drivers’, tied to inflation, rises to $250. This also covers those employers who issue prepaid transit cards to employees.

Of course, mass-transit users became unhappy and others said it unfairly promoted driving to work and promoting pollution.  Sen. Charles Schumer (D-NY) said that “mass transit is the lifeblood of New York and this provision (the $245) keeps it flowing and affordable.”6 Why isn’t it occurring to anyone that the problem is not with unfair tax breaks, but either the NYC employers aren’t paying employees enough, that mass-transit charges are excessive or simply employees have designated this as an entitlement, I mean, unearned payout?

#26- Three-year depreciation for race horses two years old or younger and #28- Seven-year recovery period for motorsports entertainment complexes.  
Before we frown on these two racing industries, it must be remembered that theme and amusement parks also have a special seven-year recovery period.  These three contrast with the usual 15-year recovery for land improvements.5  Now we can frown on all three… Incidentally, are horses suddenly experiencing shorter life expectancies?

#20- Deduction for certain expenses of elementary and secondary school teachers
The objection is not that teachers are being reimbursed, but that they should be able to be reimbursed by their school or district, or by their state in a worst case scenario.  Why is the fed being invited to participate in what must be a local issue (the intrusive Obamacore notwithstanding)?

And, of course, there are the familiar federal interventions into a free marketplace which it doesn’t trust to do it correctly.  To name a few: #3- Credit for two- or three-wheeled plug-in electric vehicles, #14- Credit for construction of new energy efficient homes, and #37- Energy efficient commercial buildings deduction

So, cost savings aren’t sufficient to provide incentive for buying them?

2) “Too-Big-to-Fail” is another area which has not served us well . The General Motors bailout cost us $10 billion, but at least some tax revenue was saved.7

However, the banks bailout made the financial system riskier because it was discovered that even banks which did not receive financial help took similar chances as those who did receive financial aid.8

On top of that, “One of the most important lessons of TARP [Troubled Asset Relief Program]and the financial crisis is that our financial system remains vulnerable to companies that can be deemed ‘too interconnected to fail.”9

Then the clincher: “the banks that got TARP not only didn’t use the money to boost lending, they actually cut their lending, at least when it came to small businesses, and that drop was larger than at banks that didn’t get TARP.”10  Fan-tas-tic.

3) Speaking of stimulus programs, the “cash-for-clunkers” ended up being a very cost ineffective way to achieve a little.  It’s not just that 45% of those who bought new cars would have anyway.  While it was estimated to have created around 2,050 jobs, it did so at a rate of $1.4 million per job.  That is SIX times the cost of the next highest recent jobs program evaluated by the Congressional Budget Office.  It did reduce carbon dioxide emissions more cheaply than the tax credit for ethanol and the electric vehicle tax subsidy, but that says more about those dollar drainers than it praises the clunker initiative.  Other government tax programs, like the House passed cap-and-trade bill of 2009 (often dismissed by the left), are much more cost effective in reducing pollution.11

4) The federal flood insurance program is a nice warm and fuzzy group of expenditures which needs to be overhauled if it is to survive.  It is currently looking at a debt of $27 billion.  While just “1 percent of the properties for which claims are filed have repeat claims,” they make up “more than 40 percent of the money spent by the insurance program to repair or rebuild structures.”  In addition, “In many cases, the property owners filing multiple claims have been paying lower, subsidized insurance rates because they live in older homes grandfathered into the program.”12  We just cannot maintain the old ways.

5) Immigration.  No, it’s not in the way many would jump to a conclusion.  In fact, those undocumenteds working with fake I.D.’s are actually helping the federal budget.  They are contributing to a retirement system for which they will never be able to collect under that identity!

[RELATED on OCR: “Carpe Diem Time for GOP on Immigration Reform”]

Rather, the eleven million who are here, but not officially, are not part of the tax base.  Now this is not to suggest a sudden, blanket amnesty.  That would be discouraging to those who entered legally but, more importantly, undermine respect for law overall.  There’s enough of that emanating from the White House already.  We need a fair and just path to citizenship.  It should include penalties, but making this 3+% of our population become a real part of our economy is both moral and beneficial to all.

Conclusion:  It’s not about spending more and more money, but spending it wisely.

Ben Kingsley, playing the part of “Cosmo” in the 1992 movie Sneakers summed it up and it’s still true twenty-two years later.  He said to Robert Redford (Martin Bishop),

“Our problems multiply: pollution, crime, drugs, poverty, disease, hunger, despair.  We throw GOBS of money at them, problems only get worse.”

Now, Cosmo’s solution was along the lines of becoming a self-appointed Big Brother, again, not unlike the current Administration.  However, we don’t need to debase the dignity of human life to fix things.  A willingness to look at the whole of the United States, not just our own little corner, will go a long way toward fiscal solvency.

[Read All Articles by Tony Rubio]



Oscar A. (Tony) Rubio is a writer who merges the lessons of history with current events to suggest a better path. He resides in Cincinnati, Ohio and believes that our national mood would be improved if we listened to more Big Band and Jazz as we look forward to the White House changing occupants on January 20, 2017. Tony blogs at www.cartaremi.wordpress.com and www.sportuoso.wordpress.com.

All opinions expressed belong solely to their authors and may not be construed as the opinions of other writers or of OCR staff.

1 – “Doing the same thing over and over, but expecting different results.”
2 – “French Government Denounces Wealthy Leaving Country After Imposition of 75% Tax Rate,” by Jonathan Turley, www.jonathanturley.org, 12/12/2012
3 – “France’s Hollande Gets Court Approval for 75% Millionaire Tax,” by Rudy Ruitenberg, www.bloomberg.com, 12/29/2013
4– “The real problem with France’s 75 percent tax,”  by Catherine Boyle, www.cnbc.com, 12/30/2013
5 – “Senate Report 112-208 – FAMILY AND BUSINESS TAX CUT CERTAINTY ACT OF 2012,” www.thomas.loc.gov
6 – “Mass-Transit Commuters Face a Hit,” by Andrew Grossman, The Wall Street Journal,” 12/30/2013
7 – “Should GM repay $10B rescue cost? CEO says no,” by Todd Spangler of the Detroit Free Press and posted USA Today, 12/17/2013
8 – “The Hidden Cost of Bank Bailouts,” by Sita Slavov, www.usnews.com, 9/26/2013
9 – from “TARP: The bailout success story that wasn’t,” by David Weidner of MarketWatch, 2/12/2013
10 – “Study: Bank bailout didn’t boost small business lending,” by Stephen Gandel, www.finance.fortune.cnn.com, 11/14/2012
11 – “Almost anything would have been better stimulus than ‘Cash for Clunkers’,” by Brad Plumer, www.washingtonpost.com, 10/13/2013
12 – from “Repeated claims imperil fed budgets,” by James Pilcher, Cincinnati Enquirer, 2/9/2014.