The Conversation About Government Budgets

By | Monday, January 23, 2023 Leave a Comment


The US Congress faces yet another debate about raising the debt ceiling, and a group of Representatives are threatening to hold the debt ceiling “hostage” to extract promises of cuts to Social Security and Medicare. Meanwhile, not long ago there was the raging months-long debate about the omnibus spending bill, and some kind of spending bill will need to be debated and voted upon again later this year. On and on. Round and round. Year after year.

I hate the way the conversation around the budget is framed. It's not so much who wants to spend or not spend on this or that which bothers me (though I certainly have opinions), it is the way we have taken to talking about the matter. The way I want the conversation to be framed, by the government, the media, and the people, is simply this: what does the collective population want, and how do we want to pay for it. Because really, at the end of the day, that is what it is all about. This way of thinking paints a much clearer picture about all the nonsense that takes place along the way.

There are those that will claim that that is the oversimplification of the century, so, allow me to explain.

The American people, through their representatives, demand that the Federal government provide a certain set of goods and services. Of course, there are endless compromises as no two people want exactly the same things in exactly the same amounts at exactly the same time. Indeed, often there are things which one group considers absolutely vital, which another considers anathema. Moreover, the “basket” of goods and services provided by the government is so vast and complex that no one citizen could ever get a handle on it all, let alone make thousands of choices between each of them. What we do instead is to elect representatives who claim to know the needs and wants of their constituents. Those representatives in turn hire armies of aids and advisors to help them make choices – choices which may or may not represent what they told their constituents they were going to do.

In the end, through a seemingly endless process of haggling and horse trading, a grand agreement is made, specifying what the Federal government will, or will not, provide. Along the way, experts, such as those at the Office of Budget and Management, will have come up with estimates of what each of these many, many line items might cost. Total that up and you’ve got the list of goods and services that the American people have demanded and an estimate of what that will cost.

At this point it is certainly possible that Congress might look at that dollar figure and say, “yikes!” So, back they go to trim and cut and tweak to get that amount down to something that won't make their constituents grab torches and pitchforks. Eventually the final, final agreement is arrived at, voted on, and passed.

Now the question is simply how do we want to pay for it. Ooops. Did I say, “simply”? Well, it's fairly simple in theory. The Federal Government has a few ways to pay for things. (1) Tax the population and other entities such as businesses. (2) Borrow money by issuing bonds. (3) Print more money. Each of these options have their own pros and cons.

People don’t really like it when the government takes some of their money to pay for stuff, even if those self-same people asked for that stuff. The more money the government takes, the less people like it, until finally, out come those torches and pitchforks again. Meanwhile, changes to taxes in any direction have impacts on the economy which can upset the whole apple cart, effecting how much money the government will receive in the end and how many goods and services people will need from them.

Borrowing money is nice in the short run, because the government gets money to spend but taxpayers aren’t immediately on the hook for it. Of course, borrowing has the problem that sooner or later the money has to be paid back, plus interest, and that becomes an issue for some future budget. And, as usual, there are impacts on the economy when the Federal Government starts issuing more debt. In particular, the government is then competing with other borrowers in the debt market, that raises interest rates, which causes a whole cascade of effects of its own. Indeed, the Federal Reserve does a lot of buying and selling of bonds specifically to manipulate the economy.

Finally, printing money is the easiest thing to do. Voila! Incurring no debt and not raising people’s taxes! What could be better? Well, it isn’t that easy. Printing money devalues the currency which decreases everyone’s buying power. So, it fundamentally has the same effect as raising taxes. Taxing people (and corporations, et als) leaves them with less money to spend. Printing money makes the money that people have worth less, requiring more of it to buy the same things (inflation.) Printing money also has the danger of upsetting foreign countries, unsettling foreign exchange markets, and in the extreme, has the risk of reducing the importance of the US dollar as a major world currency for transactions (which is useful to the USA for a separate set of reasons.)

The government, through various branches and offices, gets to choose how much money it wants to raise by each of these means to pay for the items in the budget. Within each of these methods for funding, there are additional decisions.

Printing money is the simplest. The only decision (after how much) is how fast. Raising money by taking on debt is also comparatively simple in terms of decisions. How many bonds of what payment durations, sold how quickly at what interest rates. Note that it’s not actually simple, its just comparatively simple.

Taxation is the killer, which is unfortunate since it is also the least problematic. How much money is the government going to take from which groups of actors in the economy. Will these payments be a flat amount, or a percentage of earnings, or based on something else. Will certain actors or activities be exempt from taxation. And so on. That is why the IRS tax code runs to thousands of pages.

At the Federal level, there it is. What goods and services do we want the Federal Government to provide, and how do we want to pay for it.

At the state level, the process is pretty much the same, except that states cant print their own money, but they can ask the Federal Government for funding assistance. Also, states have opportunities to tax things that the Federal Government generally doesn’t, such as property, various kinds of licenses, sales, and so forth. Similarly, counties and cities make decisions about goods and services to be provided to their citizens, and how they are going to pay for it, including getting money from their state governments.

So, at its core, the issue really is that simple. What do the people want, and how do they want to pay for it.

Into all of this, politicians have tossed things like the debt ceiling. These are all just ruses to allow groups to renege on their agreements. By invoking these limiting mechanisms, whichever group is wielding the levers of power at the moment gets to use these mechanisms to cut back on the purchase of goods and services that they had previously agreed to as part of compromises made in good faith. “Yes”, they say, “we agreed to spend money on this bridge, and those entitlements, and that tax cut, but, we hit the debt ceiling, so were taking back the money that was allocated to the things that we don’t like.” [Note: this isn't entirely accurate. It's more like the group in power is able to use the threat of not raising the debt ceiling force certain cuts to current spending and to get the other side to pre-conceded cuts in the next budget before those negotiations even begin.]

This, of course, is bullshit. The set of goods and services were negotiated and decided. The cost was estimated. It was understood that the money was going to have to be raised from various sources. Those means were chosen. But now that we are in the process of buying, using, and paying for this stuff, we are shocked to discover that we don’t have enough money to pay for it all.

Rather than having a cudgel like the debt ceiling which allows one party or the other to smash bits of the agreements that they don’t like, we should have a law that says that Congress needs to negotiate the budget in good faith, needs to decide honestly how it will be paid for, needs to accept the future impacts of these decisions (such as increasing the national debt), and provides, in advance, a contingency plan for what happens if we blow the budget for any reason.

I want to hear the conversation framed as; what goods and services do you want? OK. That is going to cost approximately this amount – are you willing to spend that amount? If not, what are you willing to give up? If so, how do you want to get that amount of money? Yes, the devil is in the details, but framing the conversation in a way that is simple, straightforward, and accurate way will make the debates about those details clearer and more rational.

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