Introduction
I have been studying government operations for 20 years. I have also researched over 8,000 agencies and almost as many government programs. The steps discussed below are based on that knowledge and experience.
If we want to control government spending, then we must do the following:
1. Use other financing methods when possible
If we want to control government spending, then we must do the following:
A. Prohibit corporate welfare
B. Sunset non-essential government programs
C. Cap government borrowing
D. Use trust funds, pay for use and other funding mechanisms
E. Enforce reasonable budgets
A. Prohibit corporate welfare
1. Enact a new law which prohibits giving money to corporations for the purposes of financial assistance due to bad business decisions. All corporate welfare and business bailouts will become prohibited.
2. Immediately call in all money lent out as large business loans or bailouts. Note that banks and other financial institutions demand immediate recall of the loans all the time; it is time our government does the same.
B. Sunset non-essential government programs
1. Make three compressive lists of program categories:
a. Essential program areas
b. Non-essential program areas
c. Constitutionally questionable program areas
Essential program areas will include services that are vital to the United States government and to the general welfare of the people. Essential services include national defense, airline inspections, and secret service.
Most other program areas will be considered non-essential programs. This includes most research programs and many social services. These may be very valuable, yet if money is tight these non-essential program areas may need to be trimmed.
In addition, some program areas are constitutionally questionable. These programs may be useful, but might not be authorized under the Constitution.
2. Determine and Approve the Lists
When determining essential programs from non-essential programs, ask a question every citizen must ask themselves: If I only have $100, and there is no magic money coming from the sky, what are the essential areas I need to spend that money on? And what areas can be crossed off the list if there is not enough money?
Who makes the judgment on categories? Private civic groups will propose the lists, discussing the three categories among themselves. Congress will approve two of the three lists: essential and non-essential program areas. When Congress approves those lists they have official meaning and applications as described below.
Members of Congress can propose program areas to add to the lists or move specific program areas among the lists. This can be done during any future legislative session.
3. Sunset all Non-essential program areas
All non-essential program areas will automatically sunset (automatically close) after 10 years.
We must enact a law with a list of non-essential program areas, and the decree that each of these program areas will be automatically closed after 10 years.
The only way for any of these programs to continue is for Congress to reauthorize the program. A Congressman must propose the continuation of the program, with persuasive arguments why the program should continue. If reauthorized then the program will continue another 10 years, at which point the program must be reauthorized yet again.
However, if Congress does not approve then the program will cease to exist. With the program gone, and perhaps the office gone that managed the program, we will have trimmed government spending.
It is very probable that many of these programs will not be reauthorized. Consider the logistics: First, consider the vast number of non-essential programs. It is impossible for more than a small percentage of these programs to be proposed for reauthorization in any one legislative session. Second, typically less than 10% of bills in any legislative session become enacted into law.
Furthermore, the proponents of the program must convince their peers why the program is good, how much it will cost, and why the government should pay for it. The opponents will have their chance to disagree and offer their arguments.
Due to the logistics of passing bills in Congress it is very probable that the program will not be reauthorized, at which point the program will cease to exist. Then multiply this scenario by hundreds of programs. These government programs and agencies will finally be eliminated.
4. Essential programs never sunset
The essential programs such as military branches and safety inspections will never sunset. Because these program areas are officially defined as “essential program areas” the programs continue to exist without any automatic closing.
Note that any of these programs can be eliminated with a vote from Congress. There is simply no automatic closing.
5. Eliminate constitutionally questionable programs
Some programs will be constitutionally questionable. They may be good for the public, but they are not authorized under the Constitution. Eliminating such programs will help keep government spending under control.
First, civic groups must create a list of constitutionally questionable programs. Note that there will be no official government list.
Second, during each legislative session a group of Congressmen should propose adding 10-15 of these program areas onto the official non-essential program list. If some constitutionally questionable programs are on the non-essential list, these programs will automatically expire in 10 years. There wont need to be any discussion of constitutionality - the program will automatically cease.
On the other hand, if these programs are proposed for reauthorization, then the opponents can discuss the constitutionality at that time. The opponents may persuade their peers, and the program will cease to exist.
Third, during each legislative session a group of Congressmen should propose the actual elimination of some constitutionally questionable programs. To be most effective, select no more than 25 programs. These programs should be the most clearly unconstitutional, and nothing as large as an entire department. Pick off the programs one by one, and let the agencies eventually wither away.
C. Cap government borrowing
1. About the debt
One of the biggest problems contributing to government spending is the debt. This is money the United States government has borrowed from private citizens and foreign nations.
The U.S. government should borrow no more than is absolutely necessary, and then pay off that debt as quickly as possible. Instead, the debt continues, and interest on the money borrowed has grown out of control. This must end.
2. Place a cap on interested paid on borrowed money
Congress must enact a law which states that interest paid on borrowed money will be capped at a certain amount. This will keep the debt at manageable limits.
Regardless of the amount of loan, or who the money is borrowed from, the United States government should never be required to pay interest that compounds forever. There must be a limit.
Cap the limit on interest at 3x the loan amount. For example, the interest on a loan of $1,000 will be capped at $3,000, with a total payment of $4,000. Similarly, the interest on a loan of $1 million will be capped at $3 million, with a total payment of $4 million.
A limit on interest of 3x the original amount is more than reasonable. The lender gets his money back, plus a large sum as profit.
If no lender agrees to these terms, then the government shouldn’t be borrowing any money. Remember, the U.S. government is never forced to borrow money. Also remember that the government can learn to live within its income.
3. Borrow only for emergencies and investments
A government should only borrow money for three reasons: a) national defense during a time of war, b) emergencies such as natural disasters and large populations dislocated, or c) investment in technology or infrastructure which will benefit the majority of the people. Those are the only reasons why a government should borrow money.
The government should consider its financial operations the same as any business. Businesses live within their income, if they didn’t the business would fail. The United States government can do the same. The government should live within its means most of the time.
On the other hand, many businesses require investments. These investments often come in the form of business loans. The borrowed money is used to grow the business, then the business makes a profit, and a portion of the profit is paid back to the lender. This is a system which works fairly well.
Similarly, sometimes government borrowing money can be good as an investment. For example, money can be used to develop new technologies or new modes of transportation. The people can make more money using these technologies and using these forms of transporting goods. That additional income can then be used to pay back the government loan.
Borrowing money is also appropriate for national defense and major emergencies. If major areas of the nation are destroyed then the nation as a whole will suffer and a balanced budget would be meaningless.
Therefore sometimes it is necessary for the government to borrow money, but this should be very limited. The U.S. government should live within its income most of the time.
D. Use alternate funding mechanisms
1. Use other financing methods when possible
The majority of government programs are funded from one path: individuals and businesses are taxed, the money goes into the general fund, and then the money is distributed by the Department of Treasury to specific agencies.
Because of this traditional path it can be difficult to control government spending: additional money for a program is often taken from the general pool of funds, rather than spent as originally allocated for each project.
Instead of the traditional path, we can create different paths for the flow of money. There are several advantages to using different paths for money flow, including: funds are less frequently comingled, and funds are more often spent as specifically allocated. It is also easier to provide financial oversight of these different paths.
There are several non-traditional paths for financing government agencies. Two of the most common alternate paths are: pay for use, and trust funds.
2. Pay for use financing
In the pay for use system of financing, the people pay directly for the services. The program is funded fully (or at least majority funded) by people who pay for the services. The money never reaches the general government fund; the program is financially self-sufficient. Furthermore, only those people who use the services actually pay for the services.
The US Post Office is a classic example. Individuals and businesses pay for shipping services, and these paying customers support the postal service. Toll roads are another example. The drivers who use the toll road are the ones who pay for the construction and maintenance of those roads.
The USDA grading service is another example: any farmer which wants his milk or beef graded must pay for the service. Thus, this USDA program is self-funded and self-sufficient.
Any program which can be funded fully or in part through a pay for use system will be independent of the general pool of taxpayer money. The pay for use system should be used whenever possible.
3. Trust fund financing and oversight
Trust funds, when properly secured, are excellent tools for financial management. Some government programs are already under trust funds. However, trust funds only work when the money is collected separately from other taxes. Also, trust funds must be strictly supervised and inspected to ensure no mismanagement of the funds.
In a typical trust fund (private or government trusts), money is set aside into a specific account. That money cannot be touched except for the specific purposes stipulated in the creation of the trust, and the money can be distributed only in the specific manner stipulated by the trust.
In addition, all legitimate trusts have oversight provisions. Someone outside the trust has authority to examine the trust operations and to discipline the manager as necessary if he misuses the funds. Such discipline can include large fines, jail time, and suspended licenses. With these provisions, the money in a trust fund will always be available for the stipulated purpose.
The government currently has some trust funds. The Federal Highway Administration has a trust fund, collected by fuel related taxes, and is used to maintain roads. The airport system has a trust fund: when you fly on an airplane you pay an airport fee which is then used to maintain the airports.
Social Security often comes to mind when people think of government trust funds. However, this is not really a trust fund. The money from employment related taxes are supposed to be set aside, as if it were a trust fund, and used only for retirement benefits. However, in reality these funds are comingled with the general fund. The government has used the money to pay for various unrelated programs, which is essentially improper management of the funds. This is a classic example of a bad trust. Instead, a proper trust fund must be created, which is kept totally distinct from the general fund, and managed by different directors. In addition, this fund must be strictly supervised by an independent entity to ensure no future mismanagement of the funds.
Despite the problems of the Social Security Administration, I believe that many programs can be funded using the trust fund system. Keeping accounts separate will minimize the possibility for comingling. By using a trust fund, the money is more likely to be used for the desired purpose. The money is also more likely to be available when needed.
E. Enforce reasonable budgets
1. Eliminate Baseline Budgeting
Since the 1970s the budget for the US Government has been set with baseline budgeting as a starting point. This is one of the main factors in creating out of control spending.
In baseline budgeting, the budget for each agency and program is the same as last year’s budget, plus a rate of growth. This rate of growth can be anywhere from 2% to 15%.
Note that this rate of growth is tacked on regardless of reality. This rate of growth will be tacked on regardless of how much the programs actually cost, the financial burden of the people, or the economic circumstances in the country. Even in the best of economic times, the rate of growth which is added to the agency budgets will usually exceed the rate of economic growth for businesses and individuals.
Also remember this is the starting point for budget discussions. The increase is automatic. The budget is presumed higher, and it falls upon the Congressmen to attack these increases, on every agency, every fiscal year. Furthermore, when there are cuts these cuts are only in the rate of growth; almost rarely are there actual budget cuts compared to previous years.
In order to keep spending under control we must eliminate baseline budgeting. Congress must pass a law which puts an end to baseline budgeting and which prohibits automatic increases in agency budgets. This law will keep government spending under control significantly.
The budget presented to Congress should start as the same budget as the previous fiscal year. Each agency which desires an increase in funds should send a detailed explanation as to why these funds are necessary. Any desired increases (including rate of growth and additional program expenses) will be considered at that time.
2. Budget should be based on income, not expenses
The budget for the government should be based on income rather than expenses. Currently the government decides what it wants to spend, then taxes the people accordingly. This process should be reversed: the government should figure how much income it will get, then allocate the expected income to desired programs.
With the current approach the government spends whatever it wants, and believes that someone will be there to pay for it. Life doesn’t work that way. I would like to have a home in Tuscany and a private chef, but I don’t have the income to do that. I have to be realistic - I must choose my expenses based on my income. The government must do the same.
How will this process work? First, the government should project the income for the following fiscal year. One way to do that is to look at the last 5 years, watch the trend, and estimate the income for the next year.
Second, the President (who is essentially the head manager for all agencies) must work with that income amount. All agencies and departments send the President their desired budget as usual. However, if the total desired budget exceeds the expected income, then the President must tell his departments to make cuts. The President must decide on a budget for each department, and then tell each department to make the necessary cuts in order to stay within that budget.
Third, when the proposed budget reaches Congress this budget should be within the projected income. If not, then Congress can make their own cuts as desired. Congress should never pass a budget which exceeds the projected income.
As a bonus: suppose that the actual income for the year turns out to be greater than the projected income? Then everyone can celebrate! The extra money can be used to pay down any debt, or be set aside for the future.
All of this can be made official by passing a series of laws. However, enforcement of these provisions will be difficult. At least with a law in place there is greater incentive for the President and Congress to follow it. The public can also pressure their representatives to adhere to these laws.
3. Send Financial Summaries to each home
I am a strong supporter of sending budget summaries to every home. At the simplest level, each home should be sent a brief financial summary of the U.S. government. This summary would include:
a. Actual income for the last 5 years
b. Expenses for each Department for the previous year
c. Expenses for Congress and Judicial Branch for the previous year
d. Debt status: amount of debt owed and to whom
e. Deficit or Surplus: Income minus Expenses = $_____
These summaries will be short pdf documents, 10 pages maximum, and can be sent as email attachments to anyone who requests the information.
This short summary will be easy to read, with the important information at a glance. With these summaries the people can get a basic understanding of the government’s financial situation. Then the people can then put pressure on representatives as needed.
Summary
If we want to control government spending then we must:
a. Prohibit corporate welfare
b. Sunset non-essential government programs
c. Cap government borrowing
d. Use trust funds and pay for use funding mechanisms,
and
e. Enforce reasonable budgets
Using these tools we can regain control of government spending. Using these tools we can reduce the government to a reasonable size again.
Mark Fennell
August 23, 2011
