Thursday, February 17, 2011

Reducing the Deficit and Debt

The 2010-11 federal deficit is now estimated at $1.6 trillion, and the national debt is over $14 trillion. The increasing debt is a major threat to national security because the interest will ultimately consume a huge percentage of the national income, especially if our government's credit rating slips and interest rates rise. We must deal with this issue sooner rather than later, and I agree wholeheartedly with those in congress who are facing this problem honestly. But, what should we do?

The President's bipartisan committee did an excellent job of defining the problem and identifying solutions. Entitlements, including Social Security, Medicare, federal pensions and Medicaid need to be put on a more secure financial footing by adjusting benefits and increasing the contributions of those who participate in these programs. These adjustments are required because the assumptions in place when these programs were approved or last adjusted are no longer valid, and have not been valid for some time. The benefits and contributions adjustments must compensate for prior year "overpayments" as well as the higher future costs of these programs.

With respect to non-entitlement spending, including the defense budget, a serious belt-tightening regime is required. However, across the board cuts make no sense. Some programs must be increased, others eliminated entirely, and some consolidated. All spending needs to be ranked on criteria related to the mission of the larger cabinet functions and the relative "value" of the outputs produced, using objective criteria. Overall, it should not be too difficult to cut the entire pot of non-entitlement spending by 5% without losing anywhere near 5% of the perceived "value" of all programs. That is due to the simple fact that the marginal utility of the last 5% of spending is often close to zero, especially if budget reductions have not been done on a regular basis.

Although I consider myself a political liberal, I do not believe that the government has a responsibility to be a "jobs" program. Rather, it is to provide necessary services in the most professional way at the lowest possible cost. This gives the private sector far more discretionary resources to grow our economy and compete with the productive capabilities of other world economies.

The approach outlined above would result in many government and private sector employees losing their jobs. I don't mind this outcome, for two reasons. First, in environments where layoffs have not occurred for some time, at least 5% of employees are not performing to minimal job requirements - they deserve to be laid off. Second, if capable people are laid off, for example in programs that are totally eliminated, these people will find jobs fairly quickly; the cream rises to the top, as they say.

Will fixing the deficit and debt be painful? Yes. However, many of those who will feel the pain also benefited for many years from government overspending. As Robert Heinlein famously popularized, "TANSTAFFL" - there ain't no such thing as a free lunch. Time to pay up, America! When the paying is taken care of, life in the U.S.A. will be much less precarious for many years to come.

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