While I sit contemplating the yet-to-be-passed-in-the-Senate debt deal, I feel that many people mulling over this compromise lack an understanding of exactly what the proposed “cuts” in the bill mean. It’s not hard to see why. Most individuals, when constructing a household budget, do not typically plan ahead to spend more than what’s coming in. Sadly, this is exactly how Washington operates, and one of the big reasons we’re in this mess. It is something known as baseline budgeting. I’ll get to how this affects the cuts in just a minute; for now, I’ll briefly explain how this works:
Say you make $50,000 a year. You make your plans around that $50,000. Even credit card purchases are made by the smart consumer with the understanding that those purchases should still fit within that framework. Going beyond is what gets a person in trouble. Moving on- say that one year, you end up spending beyond those $50,000; say, $60,000. Now, say that as you are constructing the budget for next year, you plan to spend $60,000, because that’s what you spent the year before. You still make $50,000, yet you plan based on the overspending of the year before. Voilà. Baseline Budgeting. And that, ladies and gentlemen, is a nutshell explanation of how Washington operates.
How does this apply to the spending cuts the bill currently passed in the House and moving through the Senate? Because Washington can’t seem to shed the baseline budgeting habit, those cuts will come off the top of the overspending. So, in a simplified manner- let’s say Washington is overspending by 9, and spending cuts of 2 are proposed. This means that rather than an actual spending cut, Washington will now only be overspending by 7. The key is this: overspending is STILL taking place!
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Is there a way to effectively balance the budget without cutting all spending?
Not effectively. We’re spending ourselves into oblivion across the board, especially in the area of entitlement spending. I was telling someone just the other day that even if we could just start by rooting out the waste, fraud and abuse in those programs alone the savings would be exponential. Then move on to unnecessary expenditures like wars in North Africa, subsidies to ethanol, billions of dollars in aid to nations that hate us….etc. Our spending is out of control across the board, so cuts need to be across the board as well.
The President wants to solve the problem by raising taxes so as to raise more revenue. The problem is, when taxes are raised, economic productivity plummets. When that happens, the pool of money to tax gets smaller, and smaller, and smaller either by the falling economic growth, or by the “rich” (that the President loves to demonize) simply packing up shop and taking their businesses overseas to countries that have a lower tax rate. Statistically, raising taxes on the rich simply isn’t going to solve the problem. Even if you taxed those making 200,000 a year and above 100% of their income, you’d still only come up with around 2.5 trillion, roughly. Our debt is 14.5 trillion and growing fast. This isn’t because there isn’t enough income coming in; it’s because there’s too much spending going on.
Hope that answers your question!
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