The Deficit Problem

The Deficit Problem
By T.S. Khanna, October 20, 2010


The overwhelming belief in our Democratic System as the ultimate best does not permit us to take a critical look at the unintended effects for refining the system. We must not ignore that democracy produced Nazi-ism in Germany, Fascism in Italy and recently the great budget deficits of “bubble economies” in the USA and in European countries.

These countries have been ballooning the bubble by borrowing more and more making the deficit problem out of control. Now the day of reckoning seems to be approaching. In the USA, both he parties, Democratic and Republican, have been responsible for the growing deficit. Yet, each party blames the other and both parties are preparing for a fiscal Armageddon. As someone once remarked, “Democracy is two wolves and a lamb, voting on what to eat.” One wonders if the taxpayer is the lamb.

Now the magnitude of this taxpayers’ problem warrants cooperation of the two parties, not another battle at the taxpayers’ expense.

Some of the causes and remedial measures for this problem are discussed, hereunder.

There have been several forces feeding the deficit problem; (a) The Keynesian Effect, (b) Entitlement Programs, (c) The Unions, (d) The Culture of Greed, (e) The Culture of Unearned Rights, (f) The Culture of Corruption, and (g) The Systemic Flaws.

The Keynesian Effect:
In the 1930s, a British economist, John M. Keynes, advanced a theory for a government to borrow limited funds from itself to start a new productive project which may pay back the borrowed funds within a specified period. In the early stage of the Great Depression, this theory worked well. Soon after, the political leaders started misusing the borrowing power to buy votes and popularity by spending the funds on non-productive (Consumptive) Entitlement Programs. There was no payback on the assumption that growth in economy will compensate for the borrowed funds. This initiated political economy.

In the 1940s, President Roosevelt instituted Social Security and Medicare Programs. In the 1960s, President Johnson added the Great Society Programs as well as the Viet Nam war expense. To carry out these programs, the president’s staff and the size of the government kept expanding rapidly. In the 1980s, President Reagan was elected on a pledge to reduce the size of the government and eliminate the deficit. During his tenure, the deficit galloped.

President Obama, in less than two years, has increased the deficit enormously. The $ 786 billion stimulus plan of borrowed funds, besides increasing the deficit, also transfers wealth from the most productive sector to the least productive and non-productive sectors. It has not been able to stimulate the economy as expected. It is a further burden on the economy. Yet another similar plan is being contemplated.

The problem of deficit spending on non-productive projects became infectious; several European Democracies like U.K., Ireland, Italy, Spain, Greece, and Portugal are also in similar economic pains.

Entitlement Programs:
Over the years, the number of people joining the entitlement programs has been increasing. Leadership of their representation continues the advocacy of expansion of such programs. Now the tradition of buying votes and popularity at the taxpayers’ expense seems to have set in. Beneficiaries of these programs do not consider them as a temporary privilege, but a permanent right.

To a great extent, besides being a burden on the economy, entitlement programs have been a set back to the wealth producing psychology and incentives.

The Unions:
Labor unions were created to protect the labor from being exploited by the employers. Over the years, with their right to strike, they gained power to demand and get whatever wages or compensation they decided on. The unions priced themselves out of the world market and hi-jacked the U.S. economy. The corporations and other employers started outsourcing the jobs sending more people to entitlement programs further weakening the economy.

Where the jobs could not be outsourced for physical reasons, the corporations went bankrupt. See the plight of our world leader automobile industry. This has caused a breaking point in the economy.

An open road to progress of labor unions, encouraged the formation of more unions by other types of employees to raise their wages and benefits. The police unions and firefighters unions have bankrupted some cities. The teachers unions have busted some state budgets.

The unions have been using a double-barreled gun against the public interest; increasing wages, while making it more difficult to fire a union member for not producing the competitive quality and quantity of work.

The unions have been having a gradual nibbling effect on the U.S. economy.

The Culture of Greed:
Greed serves as a high octane fuel for an economic engine. However, unregulated and uncontrolled greed of individuals and corporations can bust the economy. Unregulated/out-of-control greed culture has been prevalent in the American financial institutions. Regulation/controls have been resisted in the name of Liaises Faire as the basis of democratic economy.

Unregulated/uncontrolled prevailing greed in financial has been availing of every opportunity against the public interest making a significant adverse impact on the U.S. economy.


The Culture of Unearned Rights:
When a society allows certain unearned benefits to certain individuals or organizations out of goodness, charity, or morality reasons, over a certain period, those benefits become the birthright in the psychology of the beneficiaries. The beneficiaries become a permanent burden on the taxpayers. The culture of unearned rights has been self-perpetuating in the industrialized democratic economies. The unbearable burden is now showing up.

It is much easier to establish a wealth distribution set up than it is to dismantle it

To match this condition, the U.S. government acquired the culture of overspending. The reduction in overspending to balance the budget seems like punitive austerity in governing circles used to high salaries and perks.


The Culture of Corruption:
In the corridors of power, culture of corruption tends to establish norms for its practice without a feeling of impropriety. With the accepted practice of “Pork Projects” and the elected officials hand in glove with the lobbyists, public policies cannot be clearly defined, leave aside their adoption to serve the national interest.

Cultural changes are more difficult to bring about and it takes longer.

The Systemic Flaws:
Human nature is self-seeking and opportunist. The democratic systems have ignored this aspect of human nature.

The assumption that people in leadership positions and the citizens would feel responsible to protect and promote the public interest at the cost of compromising their selfish interest, has been consistently proven wrong.

Democratic systems emphasize the culture of toleration. This emphasis has an unintended effect of greater toleration for corruption and other deviant behavior than in other societies. It also tends to place the values of right and wrong within the same grey area on the same continuum.

Under democratic systems, various conflicting interests have constitutional equality. The disputes tend to submerge the public interest.

Authority is so spread out that there is no single organization or a person with responsibility and powers to define and protect the national interest. As a result, derailed interests continue to have an open season and become too big to be controlled democratically.

Remedial Measures:
1. The two parties persist on opposite solutions; one believes in cutting down the government size and entitlement programs, the other believes in raising taxes to balance the budget. Sudden drop in the entitlement programs can inflict a great pain on the beneficiaries so used to the benefits. High union wages have already chased the jobs out. Higher taxation is likely to chase the employers out of the country. A compromised solution would eventually involve both, progressive cutting of expenses and raising taxes in some judicious proportion, perhaps in equal amounts, on a ten-year plan. The infliction of economic pains on both sides may be minimized by stage planning. However, such a plan may have to be delayed until the economy gets stimulated.
2. The $ 786 billion stimulus plan in the works has not worked as well as expected. Since 2008, spending in public sector as been increasing sharply. The private sector has been shrinking at the same time. To stimulate the economy, private investments may be encouraged by selective tax incentives;
3. Housing market is at life support. Administer a quick CPR by suspending property tax on personal homes for five years. It will stimulate the pent up demand suppressed by property tax.
4. Government must serve as a facilitator, not as a provider. Government is not a charity institution. Financially, government must depend upon its people. It cannot last if people depend on government. All future policies may keep this in mind.
5. Entitlement programs may be gradually phased out of government jurisdiction on a 10-year plan and phased into religious and charity institutions run on voluntary donations. In good part, the divisive campaign contributions may then be diverted to uniting charity donations on a non-partisan basis;
6. On a fast track, develop and strictly enforce the regulations required to monitor and control our financial institutions;
7. Adopt constitutional amendments to (a) disallow deficit financing for non-productive projects like entitlement programs. All deficit financing projects may be conditioned to return the funds with interest within a specified time period, (b) eliminate or suspend constitutional obstructions in removing the deficit on emergency basis, (c) separate political and economic powers, leaving no room for political economy;
8. Adopt budget rules to set aside 10% of the annual revenue for twenty years, as a reserve fund. After ten years, the budgeted expenses may not exceed the funds equivalent of average annual revenue. After twenty years, the treasury may have emergency reserve funds equivalent of average annual revenue. After every emergency use, the funds may be replenished;
9. Modify the tax structure to stimulate the economy, on a ten-year plan, without discrimination in income groups, (a) Require individual tax returns from all adults including those married, (b) Allow tax exemption for the first fifty thousand dollars annual income for everyone, and, (c) suspend all tax loop holes and write offs and apply the same flat rate of taxation to all income groups;
10. After ten years or full recovery of the economy adopt a tax structure that may assure continuous wealth production. The flat rate may be limited to 20% for federal tax and 5% for state tax. Constitutional amendment would be necessary to limit the government’s power on adopting tax rates. Government must learn to live within its means also;
11. Voting age may be raised to 30 and voting rights may be given to only those who have paid taxes for at least five years with a good standing in society, i.e., good moral character without felony conviction and a clean credit record.
12. On a fast track, establish Fair Wages Commission to adjust labor wages to compete in the world market and attract back the outsourced jobs.
13. Disallow unions in public sector. All public officials and employees may be conditioned as 24/7/365 employees and their salaries and perks may be set by the Civil Service Departments.
14. Effective earliest, start reducing salaries, compensations, and perks of all elected/ appointed officials and public employees by 5% per year for the next ten years. Public employees’ pensions, social security, and medicare benefits may be reduced by 3% per years for the next ten years. (The value of money is relative, not absolute. With reduction in incomes, prices of goods also goes down, except for the imported goods. Thus the standard of living does not go down by the same percentage as the inomes do).
15. Adopt laws and establish rules and norms supportive of zero toleration for corruption in governmental operations. Require all public officials and employees to forego certain rights that do not permit fast track justice against corruption, at the time of joining the service.
16. Phase out all foreign aids in the next two years.
17. Effective immediately, start reducing the size of government by phasing out non-essential services, agencies, and departments. The laid off workers may be absorbed in productive projects. Maximize productive economy in private sector; minimize consumptive economy in public sector.