This weeks column by Ron Knecht: Talk Nerdy to Me, Part II: Budget Constraints In my last column, I explained how government, including public education, lives in the make-believe world of “baseline budgeting”. That process, which sounds superficially reasonable, distorts discussion of issues and public policy in favor of rapidly growing government spending and endless tax increases. The essence of baseline budgeting is this: Government spending and taxing are driven by bureaucrats constructing wish lists for next year’s budget that start with this year’s spending and artificially inflate it to unreasonable levels. They use numerous upward adjustments and seldom make downward adjustments that are warranted, such as cuts in spending levels for regular productivity gains. What’s the alternative? It’s what individuals, families and private businesses do in their budgeting. That’s what people mean when they say that government should be run like a business. Statist liberals often condescendingly sniff that government is not a business – as if that proves that the processes and standards that apply to the private sector can’t apply to government. They also claim the public sector is too important to be subject to the same constraints that apply to the private sector, which they claim is less important. Both conclusions are wrong. How do individuals, families and businesses do their budgeting? Unlike government, they don’t start by making a spending wish list, totaling its costs, and then subtracting expected revenues and concluding that the difference must be made up via tax increases. Instead, they first assess how much income they expect to get. For individuals and families, this is the amount left after taxes are taken out of their paychecks, earnings and other revenues. For businesses, it’s the amount of revenues generated from sales and other sources, less their tax and unemployment insurance payments, etc. The income remaining is what economists call the budget constraint (or revenue constraint), and it’s the key thing. Within the bounds of their budget constraints, people and businesses prioritize their spending options. Some payments are necessary to keep the enterprise going, and they come first: rent or mortgage, bills to suppliers of utilities and other basic goods or services, including employees for businesses. They create a running total of the expenses to which they commit and they subtract that total at each step from the budget constraint. They proceed next to things that are discretionary – that is, things that might add value to their lives or business activities but are not essential to ongoing operations. For each item, they examine how much is left after deducting the running total of their expenses from the revenue and what other discretionary expenses are still possible or are ruled out by the spending already scheduled. If one discretionary item takes up too much of their income, they won’t be able enjoy the others they wanted. Even if they don’t do budgeting in an explicit process like this but instead just make their purchases depending on how much money is left in the checking account and on the credit cards, the effect is the same. That is, they can’t on a sustained basis spend more than their income, and if they splurge on something, they will sooner or later have less to spend on other things and will have to curtail something. This process forces people and businesses to become ever more efficient in their choices, with businesses continuously becoming more productive and consumers providing the resistance to price increases that give business ever more incentive to increase efficiency. Without a mechanism that drives efficiency, we don’t get it and we don’t get economic growth and increasing human wellbeing over time. If the world operated on the cost-plus basis used by government, we’d have no progress and still be living in caves and trees. So, government should be run like a business: Instead of baseline budgeting leading to ever-increasing demands for tax increases, government administrators, executives and legislatures should be provided firm budget constraints dictated by the revenues expected from existing tax and other revenue sources. The failure to observe these principles has allowed – caused, actually – the portions of our lives, incomes and economies that are consumed by government to steadily and greatly increase over many decades to extremely dysfunctional levels. Empirical research shows that economies grow and thus human wellbeing increases most when the government spending fraction of the economy is less than 25 percent – a level not seen in over 55 years. Due to this trend, the income and wealth levels of normal folks have stagnated and their liberties and opportunities have been diminished. Is government more important? No. The private sector provides goods and services such as food, housing, warmth, etc. that are just as important as those provided by government. And government provides many things that are unnecessary and even some of no real social value at all. It’s time for tax and spending reform.
Posted on: Wed, 29 Oct 2014 18:29:57 +0000
Trending Topics
Recently Viewed Topics
© 2015