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Essay Name       : 829.txt
Uploader         : J. Anderson
Email Address    :
Language         : English
Subject          : Economics
Title            : Can we make ends meet?
Grade            : A
School System    : College
Country          : US
Author Comments  :
Teacher Comments :
Date             : 11/10/96
Site found at    :
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CAN WE MAKE ENDS MEET?

Should the government balance the federal budget?  One might
assune assume that it would be good to balance the federal budget.
However, a few economic thinkers disagree and have suggested new
paradigms.  For the last sixty years, the government has run budget
deficits as a primary method for stimulating economies with high
unemployment rates.  In theory, the budget should return to balance or
surplus during boom times.

According to the article, "The Balanced Budget Constitutional
Amendment," (Center on Budget and Policy Priorities, January 9,
1995), the Reagan administration cut taxes to such a degree that the
United States would forever face high deficits, regardless of how hot
the economy was.  The writers of that article believe the answer is not
a balanced-budget amendment because they believe it would prevent
the federal government from combating recessions:

Worse yet, under such an amendment, the federal government
would be forced to make recessions worse. When the economy
slows down, income and Social Security tax revenues drop, due to
falling wages and profits. Meanwhile, costs for some programs,
such as unemployment compensation, rise.
These changes automatically put the federal budget into deficit,
even if a balanced budget had been planned at the beginning of
the fiscal year. If a constitutional amendment requires the
government to balance spending and revenues at the end of the
year (not just in the original plan), then the White House would be
forced to cut spending or raise tax rates, thereby slowing the
economy down, just at the time when it is most in need of stimulus.

One argument for a balanced is as follows:  Deficits force the Federal
Government to borrow money on the capital markets.  That
Government borrowing competes with businesses borrowing to buy
factories and machines that make workers more productive and raise
incomes; and with families borrowing to buy new homes, cars, and
other goods that provide valuable services for years.

The competition for funds tends to produce higher interest rates.
Also, deficits increase the national debt and, through it, the
Government's obligation to pay interest. The more it must pay to
service its debt, the less it has available to spend on education, law
enforcement, and other important services, or the more it must collect
in taxes forever after.

Today, the Government must spend 40 percent of every personal
income tax dollar to pay interest on the national debt
Recent deficits have not financed investments. Instead, they have
merely helped the Government to pay its day-to-day bills. Under those
circumstances, future generations will inherit a debt for which they
receive no real benefit.

One difficulty with government budgets is that economic conditions
are subject to change, causing receipts and outlays to be quite
different from what was planned. If unemployment increases by just a
small percentage, for example, the government may lose billions of
dollars because of less income from tax receipts and higher outlays for
welfare and unemployment benefits.



Balancing the Budget

Originally planned to make spending cuts in the areas that seemed to
be growing at the greatest rate and comprising the largest portion of
the budget.  These areas were entitlement programs and the federal
debt.  Unfortunately, Social Security only had 3 items and Net interest
only had 1 item.  Health and Medicare had 22 items and Defense had
38 items.

When I found that making cuts in these areas did not result in a
balanced budget, I tried a new strategy.  Instead, I used a highly
complex and extremely scientific procedure to balance the Federal
Budget.  I went on an outlay cutting rampage, cutting every spending
program I came across with the exception of those that would have
made me feel morally uncomfortable.  To my best recollection, I did
not cut benefits to senior citizens or children.

I wanted to cut Social Security spending by identifying fraudulent
claims and other waste.  I would not cut the benefits of people who
have worked hard all their lives and raised families.  Rather, I would
cut the benefits to people who have the potential to abuse the social
security and welfare system.

According to "Fiscal Crossroads:  Facing Up to the Budget Deficit "
federal spending patterns have changed significantly over time:

"At the Nation's founding, the federal government spent only on
war-related costs, certain pensions, and a few other items.
Gradually, however, it came to accept  more and more
responsibility for the health, welfare, and safety of the growing
American populace, and its spending in these categories rose
accordingly.
Growth of Entitlement Spending:
In 1962, when President Kennedy was in office, 70 cents of each
dollar the federal government collected and spent was spent at the
"discretion'' of Congress.
Today, 64 cents of each dollar spent by the federal government is
on automatic pilot-leaving only 36 cents for Congress to have
discretion over.
By 2003, 72 cents of each dollar the federal government spends
will go for entitlement programs and interest on the debt. Only 28
cents will be available for discretionary spending.
Defense and Discretionary Spending:
In 1962, defense spending accounted for almost one out of every
two dollars the federal government spent. Since then, defense has
been cut 65 percent (as a percent of GDP) and now comprises just
18 percent of all federal spending. Domestic discretionary
spending has been reduced about 50 percent (as a percent of
GDP) since the 1960s and accounts for approximately 16 percent
of all federal spending.
Foreign Aid:
Despite widespread perceptions to the contrary, spending on
foreign aid has comprised a very small share of spending for each
of the past 30 years. Its share fell from 5 percent in 1962 to 1.4
percent today. Foreign aid comprises less than 1 percent of federal
expenditures.
Where does the federal government spend our tax dollars today-
and what trends lie ahead?
Social Security:
Social security is the single biggest federal expenditure. It
accounts for 22 percent of all federal spending. The government
will spend $334 billion on it this year. By the year 2000, the annual
costs will increase by $100 billion to $434 billion.
Defense:
The second largest federal expenditure is national defense. This
year it will cost the federal government $270 billion and will
comprise approximately 18 percent of federal spending. This is a
reduction from last year, when the government spent $282 billion
on defense and it comprised nearly 20 percent of federal spending.
By the year 2000, it is scheduled to decrease to 15 percent of
federal spending.
Interest on the Debt:
Net interest payments, the result of previous budget deficits,
consumed only about 7 percent of federal spending for most of the
1960s and 1970s. Today it is the third largest federal expenditure-
$235 billion this year-and accounts for over 15 percent of all
federal spending. By 2000, net interest on the debt will rise to $313
billion and surpass defense spending to become the second
largest federal expenditure.
Medicare:
Medicare, which provides health care coverage for over 37 million
elderly Americans, includes Part A, hospital insurance, and Part B,
insurance for physicians and other services. It is the fourth largest
federal expenditure. It accounts for 10 percent of all federal
spending. The government will spend $178 billion on Medicare
costs this year. By the year 2000, its annual cost will increase to
$288 billion and represent nearly 15 percent of all federal
expenditures.
Medicaid:
Medicaid is the health care program for the poor. The federal
government shares the costs with the states, paying from 50 to 83
percent of them. Both federal and state costs are growing rapidly;
Medicaid accounts for 6 percent of the federal budget. This year
the federal government will spend $90 billion on Medicaid. By the
year 2000, annual costs are projected to increase to $149 billion. It
will rise from 5.5 percent of federal expenditures to 7.5 percent.
Federal Retirement Programs:
Federal civil and military retirement and disability programs
comprise 5 percent of all federal expenditures. This year the
federal government will spend $75 billion on these programs. In the
year 2000, the projected annual cost will be $96 billion and
represent the same share of federal expenditures.
Aid to Families with Dependent Children (AFDC) and Food
Stamps:
These two programs-which together account for approximately 3
percent of federal spending-have received the most public
attention and are perceived to be a much greater cost to the
government than they are. The federal government will spend $44
billion on these two programs this year. In the year 2000, projected
costs will increase to $54 billion, representing 2.7 percent of
federal spending.
These figures illustrate an important fact about the budget: a
handful of programs account for the vast bulk of federal spending.
Social Security accounts for 22 percent of spending, defense for 18
percent, net interest for 15 percent, Medicare for 10 percent,
Medicaid for 6 percent and federal retirement programs for 5
percent. Together, these programs account for over 75 percent of
all federal spending."
(Source:  http://www.uwsa.org/busround/8longterm.html)


Economic variables affecting revenues

The economic variables having the largest impact on government
revenues include (un)employment, interest rates, Inflation, and
population.




Economic variables affecting outlays

The economic variables having the largest impact on government
outlays include (un)employment, interest rates, Inflation, and
population.

For its forecast, the Congressional Budget Office has assumed that
economic variables will remain stable, almost unchanged, over the
next five years.  I believe this is unrealistic since the economy
changes cyclically.

Because economic variables are not stable, the impact on
government revenues and outlays is that their forecasts and
predictions are less reliable.

This would affect my deficit reduction strategy as we discussed in the
beginning of this paper.  Changes in the economy walways affect the
federal budget.  Slowing of the economy can put the federal budget
into deficit, even if a balanced budget had been planned at the
beginning of the fiscal year.



The Ultimate Question

The ultimate question was whether I could balance the federal budget
within the next five years?  The answer is, "Yes, I can."

If I remember correctly, I produced a surplus of around 65 billion
dollars in the fifth year.  I achieved this without raising taxes even one
penny.



The possible beneficial effects of my strategy are as follows.  With
less interest to pay on the public debt:

we would not have to raise taxes.  Thus, we could provide more
incentives to businesses to expand and create more jobs.

we would not have our nation's output transferred abroad to pay
interest and principal on the portion of the debt held by foreigners.

the government would no longer have to borrow to refinance (drive
interest rates up).  Thus, private investment spending would
increase.   One approach of disposing of the surplus involves the
government transferring its surplus tax revenues back into the
money market, causing the interest rate to fall and thereby
stimulating investment and consumption.  In another approach,
government can realize a greater anti-inflationary impact from its
budgetary surplus by allowing those funds to stand idle.

we may see decreased foreign demand for American securities
(due to lower interest rates).  This would decrease the international
value of the dollar, causing American exports to increase and
imports to decrease.   The resulting rebalancing of the trade deficit
would exert a positive effect on our domestic economy.


The possible negative effects of my strategy are as follows.  With the
cuts in defense spending:

our economy may encounter a siege of unemployed defense
workers.  With falling incomes, tax receipts will automatically
decline.   To balance its budget, government must either
    1)  increase tax rates,
    2)  reduce spending, or
    3) use a combination of both.
    The problem is that these policies are contradictory;  each one
    further dampens the economy.

One solution might be to use a portion of the surplus in our budget to
retrain the unemployed defense workers in new growth fields.

With the surplus of money put back into the economy,

we may see money incomes increase during a time of inflation and
therefore tax collections will increase.  To avoid a further surplus
from occurring, the government must either
    1) cut tax rates,
    2) increase expenditures, or
    3) use a combination of both.
    All three of these policies will add to inflationary pressures.


Conclusion

In addition to the spending cuts discussed above some of the
proposed or enacted remedies for deficits and public debt include:

a proposed constitutional amendment mandating an annually
balanced budget

the Graham-Rudman-Hollings Act which required annual deficit
reductions

budget legislation of 1990 which raised taxes, cut expenditures,
and forced Congress to offset new spending or tax cuts with
reductions in existing spending or tax increases

greater privatization of the economy by selling public assets and
programs to the private sector;  and

giving the President line-item veto authority.


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