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Action Plan Target Report
for government spending and debt

by Michael Hodges - email
(updated May 2011)
- a chapter of the Grandfather Economic Reports -

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SETTING TARGETS FOR A BITE-THE-BULLET PLAN

for federal, state and local government spending and debt

(This report is a part of the series of the Grandfather Economic Reports, revealing certain negative economic conditions facing families and their children, compared to prior generations - at http://mhodges701.home.comcast.net/)

OBJECTIVE: If you ask, "How much of our economy's national income should be controlled by federal, state and local government and how much federal debt should be allowed in peace-time?" Most will answer, "About 20% of the economy for spending, with zero debt." But, today's government consumes more than twice that much - approximately 50% of the economy - - and federal debt is $14 Trillion. The objective of this report is to address this issue - - and determine spending and debt targets, with an eye to historic precedent - -and develop a master plan to acquire the target.

SUMMARY: This report, with history as a guide, will point toward a reduction of federal government spending from 32% of national income to 12%, and state & local spending from 18% of the economy to 8% (bringing said combined spending close to that achieved prior to WW II) - and, federal debt from $14 trillion to zero over 20 years. Said reductions will be accomplished by spending reductions (primarily by cuts and privatization in the social arena). In addition, any budget surpluses created by today's excessive tax rate/revenue shall be refunded to citizens via tax rate cuts.

Is this objective a fairer bequest to our next generation - more in line with our founding forefathers' intention?

HISTORY - as a guide to establishing targets

When establishing targets, a review of historical data is of great significance as seen from the following 3-part chart:

shares of economyLeft chart: 1929, before the New Deal Social Spending: Combined government was 12% of the economy (3% federal govt. and 9% state & local govt.) leaving the private sector share at 88%. The private sector was about 9 times larger than the government sector.

Center chart: 1940, before World War II, Combined government was a 24% share (13% federal plus 11% state & local), and private sector share was 76%. Here, the private sector was about 3 times larger than the government sector - - down from its 9 to 1 ratio above.

Right hand chart shows today's status, showing the tremendous growth of government (on top of the large increase realized due to the New Deal social programs) with combined government spending now consuming over 50% of the economy (32% federal plus 18% state/local), reducing the private sector to a 49% share. Here, the private sector and the government sectors are nearly equal in size.

For additional detail, see the Private Sector Report, the Federal Government Spending Report and the State & Local Government Spending Report.

Our targets will include accepting the social spending increase in share of the economy brought on by the New Deal (upper left chart), reject the current situation (upper right chart), and set our targets close to the middle chart.


SETTING TARGETS FOR GOVERNMENT SPENDING at 20% of the Economy

target chartHere is a chart showing OUR targets for total government spending ratio of 20% of the economy, based on history. (also see other supporting study below)

It is quite similar for the private sector as the middle chart above, with the private sector returned to 80% of the economy (measured by national income) - - from its current 57% share.

With federal government spending targeted at a 12% share of national income, and state/local at an 8% share - - resulting in a private sector share target of 80%.

target vs. actualsThe left table contains the current ratios of 51% government vs. 49% private sector (column 1), together with the above targeted ratios of 20% government vs. 80% private sector (column 2) - - for ease of comparison one to the other.

The 3rd column shows the percentage spending reductions from current spending levels, and the % increase resulting to the private sector, required to meet targeted ratios.

 

Combined Government Spending Share of Economy should be brought in line not to exceed 20% of the Economy, instead of current over 50% share today. Therefore, Federal spending would be targeted at 12% of the economy instead of 32% (a 63% cut needed), and state & local government targeted at 8% instead of 18% (a 56% decrease).

This would increase the private sector's share of the economy (national income) from today's 49% share to an 80% share.


If the targets of this chart were met in 2010 with federal spending at 12% national income and state & local government at 8% >

Federal government spending would have been $1.4 Trillion, 63% less than the $3.8Trillion that did occur. State & Local Government spending would have been $933 billion, 56% less than the $2.1 Trillion than did occur.

As a result, the pure private sector would have been $3.4 Trillion larger.

 

80% private sector and 20% government is a fair approach - based on historyy


Another Item Supporting Government Limited to 20% of the Economy

An extensive study called 'The Size and Functions of Government And Economic Growth', Joint Economic Congressional Committee, Jim Saxton, chairman, April 1998, showed that >

Government spending at approx. 20% GDP best desirable for economic growth.

This finding should not be surprising, since few economists would agree that the government sector is the prime driver of economic growth over the long term. Therefore, the higher the government spending share of the economy the lower its economic growth.

This study is reported in the chapter called the International Comparison Report.


TAX CUTS TO ACHIEVE SPENDING CUTS - - the political method to achieve spending targets

The approach taken here in establishing targets is to do so on the spending ratio side, instead of the tax/revenue side. This is the proper approach, as spending ratio reductions MUST be the target. However, politically speaking it is more difficult to implement spending program cuts necessary to realize the approximate 63% reduction required per the above table. Big government proponents are a powerful force, and will claim every dollar of any spending cut is actually a plan to starve children and old people. This has been an effective argument in the past, resulting in huge government. It will be used as a tactic time and again. So, spending reduction plans are one thing. How to implement is another.

Nobel Laureate Economist Milton Friedman (in his book, 'Bright Promises, Dismal Performance'): "I favor tax cuts. Our basic long-term need is to stop the explosive growth in government spending. I am persuaded by the experience of decades that the only effective way to do so is limit government revenue, by cutting taxes - - at any time for any excuse in any way. The reason is that government will spend whatever the tax system raises plus more - - but not an indefinite amount more - - as the out-cry for deficit spending will limit this. The most effective way to force each of us to economize is to reduce our income. The restraint is less rigid on government, but it is there and seems to be the only one we have."

The Tax Report shows the average American worker had to work 5 months per year to pay all federal and state/local government taxes (income taxes, sales taxes, excise taxes, property taxes, etc.), compared to 1.4 months required for those working when I was a small child. Taking the esteemed advise of Dr. Friedman, the most politically-feasible method of achieving proper spending ratio cuts is most likely by a mullet-year program to reduce the number of months required of a worker to cover his 'share' of all taxes. Using the same ratio as the above table, this would mean cutting the working period by 56% - - from 5.3 months per year per employee to 2.1 months per year. The trillion dollar industry of those receiving government payments would howl loudly, but with less effective 'bark.' Their new defense most likely would be to give in on tax cuts, but try and limit them to a one-time affair (calling it a targeted tax cut), with hopes that once taxes are cut in one year the public will think all is now OK, and the big government proponents can then continue on their spending programs into the future.

It must be kept in mind that the objective here is spending ratio reductions. Multi-year tax reductions can accomplish the same thing, as the fear of deficits (coupled with our debt principal reduction plan below) will cause spending cuts as a result. In any case, this exercise of setting targets and supporting planning formats will be stated from a spending ratio reduction view-point in, this presentation to follow.


THE TARGET FOR NATIONAL DEBT

(Here we mean the total principal balance of the debt, not just zero budget deficit. And, we are talking not just about 'on-budget' debts, but also the 'off-budget' debts owed the various trust funds)

For detail historic trends on debt see the Grandfather Federal Government Debt Report

FROM: current $14 trillion debt TARGET: $ O - - via a 20 year amortization plan financed by spending cuts.

DEBT REDUCTION AS A MEANS TO REDUCED SPENDING AND REDUCED DEBT

We have seen in the Government Size Report, and in the Federal Government Spending Report, that total government spending has grown 4 times faster than the economy's growth, and the federal government sector alone has grown 9 times faster than the economy. Nobel laureate Milton Friedman views about the effectiveness of government spending were that it is the high level of total government spending that is the problem. I, for another, concur with his 'its the high level of total (meaning federal + state/local) govt. spending that is the problem'. And, Friedman also says 'I am convinced in all my studies that governments will continue to spend all revenues they receive (plus some more), and am convinced the only solution to reducing spending is to reduce revenue (taxes).' What he's saying is you must put pressure on the available revenue side. And, as the Reagan era shows, by reducing taxes spending may not be reduced at first but such produces deficit pressures which in turn forces a spending slowdown (restraint), below what it would have been without said tax cut. (had Bush & Clinton, in the 1990s, not reversed that course via record tax increases, the Reagan action would have resulted in even more spending cuts over time than occurred). Taking this a step further, if we call for a reduction of debt principal, the same should happen as far as spending is concerned, as to meet an amortization of some type in a budget (and politicians should be required to have debt principal payments in each budget) other spending would have to be reduced. So, the Friedman approach holds for spending reductions, whether you reduce taxes or pay down debt principal. Therefore, if reduced spending is a goal, then all approaches to accomplish same are viable, taxes and/or debt principal reduction. Of course whenever one calls for tax cuts, then those for big government spending know tax cuts will force mullet-year spending cuts, eventually - - and they use the defense to protect turf that all tax cuts are 'for the rich' to de-rail said efforts. From this, I conclude that those against reducing debt are in fact also in the camp of those for big government who are against reducing spending. But, debt reduction cannot be defended against by 'for the rich', and represents a vital strategy to spending reductions. Therefore, I am for debt reduction as a means to reduced total govt. spending as a share of our economy.

I am for debt reduction as a means of realizing lower spending ratios, AND lower debt, as a beneficial bequeath to the next generation.

NOTE: if today excessive tax collection (highest in peace-time history per Tax Report) cause a surplus in the 'on-budget' accounts, then said surplus should be returned to citizens via tax rate cuts. Then, the spending ratio targets of this report should be achieved by reducing said spending.


From the above, we have seen that in order to reduce spending ratios, a combination of tax cuts AND debt principal reduction should be employed as the only effective methods


IT IS RECOGNIZED

TO ACHIEVE THESE TARGETS REQUIRES A CONTROLLED AND PHASED REDUCTION OF GOVERNMENT (federal AND state & local ) SPENDING OF MORE THAN 50% FROM CURRENT LEVELS, and ELIMINATION OF OVER $11 TRILLION IN DEBT

Should we hide our head in the sand, or go for it ?

With this in mind, many will simply throw up their hands, announce mission impossible and do nothing. With nearly 50% of our economy now dependent on government spending, there will be fierce resistance from many adults. This will be despite the knowledge of most seniors, that not only are their own living standards better by far than their forefathers, but they actually paid significantly less share of their income during their working years for their elderly than do their own working children today. And, most young adults are very concerned about the economic future of their children, and the lower quality of their education. To be concerned on one hand and resist corrective action on the other is the challenge.

As David Boa of the Cat Institute said: "The 20th century has been a failed experiment in big government. Every day more people see more ways that problems could be better solved by profit-seeking companies, mutual aid associations, or charities than by government. Private capital markets can provide actuarially sound insurance and offer better retirement benefits than Social Security. A company called Human Capital Resources wants to sell equity investments in the future earning power of college students as an alternative to student loans--better return for investors, less post-graduation burden on students, and no cost to the taxpayers. Private communities, based on governance by consent, can be better tailored to the needs and preferences of 250 million diverse Americans than local governments can. Private schools provide a better education at lower cost than government schools, and in the next few years information technology and for-profit companies will revolutionize learning. Private charities get people off welfare rather than snaring them in it."

"In the meantime those spending the $5.9 trillion of federal-state-local governments are not going to give up their power without a fight. The U.S. Postal Service tenaciously clings to its legal monopoly (although it supposedly has been 'privatized,' and the federal government never funded its pension liabilities - author's note). School boards and teachers unions declare they won't let children "escape" from their schools, and spend millions to prevent the implementation of school choice plans (while the President calls for volunteers to teach children to read because government schools fail to do so, schools of other nations out perform us in math and science, despite less per student spending, and politicians and many public school teachers send their own kids to non-government schools - author's note). The people who benefit from the existing system won't willingly downsize government even if all customers desert it. (As school enrollment in the District of Columbia fell by 33,000--about 25 percent--the system actually added 516 administrators.) The 800,000 postal employees are not going to quietly accept layoffs even if we send all our communications electronically. We cannot simply wait for "social forces" or technology to automatically replace bloated government. To ensure that such changes happen, individuals will have to demand their right to choose schools for their children, to compete with the Postal Service, to invest their money in a secure private retirement fund. And then taxpayers will have to work to ensure that government stops producing services no one uses any more."

Most politicians will cover their eyes while they promise everyone that his or her government program will not be cut, since they want to retain their chairs and recognize that our children and grandchildren cannot vote on their futures.

Such a reaction would be immature, selfish, and irresponsible toward our youth - - the next generation .

At least let us systematically set reasonable targets based on history, and then establish various sample implementation plans aimed to accomplish our goals, always keeping in mind that we want to assure that the next generation will realize improved economic opportunities. We owe them to UN-cover our eyes and roll up our sleeves.

targetpie.gifOn this page we have produced a set of targets with an eye to history.

On the next page is presented a type of format to meet these targets, in a manner easy to understand. Certainly the 'devil is in the details', but first we need an over all plan of action. To argue over detail in the front guarantees there will not be a plan, and those who prefer big government will make just such an attack. I say first targets, then plan, and lastly details.

Here is a planned approach to get people thinking.

If you have a better approach, please present it.

TAKE THIS LINK TO an easy-to-follow Action Plan > > >


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Copyright 1997-2011 Michael W. Hodges. The Grandfather Economic Report series is the intellectual property of its author; all rights reserved under Copyright Conventions. Permission to redistribute all or part of this series for non commercial purposes is granted by the author, provided the associated web page address is included and full credit given to the Grandfather Economic Report and the author, Michael Hodges. Notice appreciated via email.

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