Tag Archives: Fiscal policy

Shell Games And Fiscal Policy

For the past several years, Democratic Governor Dan Malloy of Connecticut and Republican Governor Chris Christie of New Jersey have engaged in a public war of words over fiscal policy. Despite the economic similarity of their northeastern states, the two men have repeatedly clashed on television over their strategies for restoring fiscal discipline in government.

Malloy, following traditional Democratic doctrine, has chosen to maintain government spending in the face of economic malaise by raising taxes in order to eliminate budget shortfalls. Meanwhile, Christie, adhering to classic Republican policies, has slashed spending and reduced taxes in pursuit of the same goal.

So which strategy has proven itself to be the successful one? Regrettably, neither one has done so. During the past month, in fact, both Governors have acknowledged failure.

The first failure occurred in Connecticut, where Governor Malloy had been accused by his political foes of generating $500 million in excess cash by over-borrowing on debt. He had announced plans to spend the cash by mailing $55 checks to Connecticut households as election year tax refunds.

But then the anticipated $500 million budget surplus suddenly vanished with the collapse of overly optimistic economic assumptions. Because the excess cash was needed to finance normal government operations, the proposed tax refund vanished as well.

Meanwhile, in New Jersey, a similar collapse of overly optimistic economic assumptions forced Governor Christie to slash required payments to the state’s employee pension plans. To compensate for unexpectedly low tax revenues, the Governor decided to redirect the funds to finance normal government operations.

Ironically, Governor Christie himself initially agreed to authorize pension plan contributions at levels that would help the state “catch up” for many previous years of fully or partially cancelled payments. His predecessors had often balanced their budgets by redirecting pension funds to meet current needs.

But when Christie found himself in the same situation that had plagued his predecessors, he opted for the same choice that they had made: to shift budgeted pension funds into current year expenditures.

And so the “shell game” of government fiscal policy continues on both sides of the political aisle. Whenever debt generated funds or pension plan funds are shifted to finance current government operations, future budgets become more difficult to balance while the size and scope of government remains unaffected.

How would you modify the budgetary practices of our government officials to ensure the long term fiscal solvency of our states?

Federal Budget: What Deficit?

Do you remember the American government shutdown of October 2013? Just five months ago, the “deficit hawks” of the United States Congress refused to finance the continuing operations of most of the federal agencies and functions.

They claimed that they were deeply concerned about the unrestrained debt financed spending habits that were imperiling the financial futures of the American people. And they had a point; after all, the federal government deficit had exceeded $1 trillion in each of the four fiscal years 2009 through 2012.

Last week, however, the U.S. General Accountability Office (GAO) announced some stunning news. Apparently, the deficit had plummeted to $680 billion in fiscal 2013; it represented the fastest deficit decline in the United States since the end of World War II.

Before we get too excited by that “historic” decline, of course, it would be helpful to remember why any such decline was possible in the first place. After all, had the deficit not climbed to record levels during the previous four years, it would have been impossible for the GAO to announce such a dramatic decline this year!

Nevertheless, for individuals who remain concerned about American profligacy, the decline can be perceived as a return to a level of relative normality. The United States produces $17.1 trillion of Gross Domestic Product (GDP) per year, an amount that is roughly 25 times as large as the $680 billion debt.

A ratio of 25 to 1 may be worrisome, but it is certainly not catastrophic in scope. It is analogous, for instance, to a family that earns $100,000 per year and that needs to borrow an additional $4,000 to make ends meet during a financially challenging period.

The total accumulated debt of the United States now exceeds $17.3 trillion. That is roughly 1% higher than the $17.1 trillion of annual GDP, representing (again) a troubling but not terrifying difference. It is analogous to a family with annual income of $100,000 that decides to carry a $101,000 mortgage.

These analogies are not perfect, of course. The federal government’s debt must be refinanced at regular intervals, while a family can often “lock in” mortgage debt at low fixed rates for up to thirty years.

On the other hand, a family can lose 100% of its earnings when a head of household loses his (her) job. The federal government, though, can continue to receive significant tax revenues throughout the most dire depression periods.

These facts may explain why Congressional Republicans recently “caved” (in the words of their own supporters) during negotiations over the debt ceiling. Although long term budget projections do show federal deficits climbing back to unsustainable levels within a decade, politicians on both sides of the aisle appear to be content to permit current budget policies to remain in place for now.

If you were Comptroller General Gene L. Dodaro of the GAO, would you regard the 2013 budget deficit as a promising sign of fiscal health, or as a troubling sign of fiscal stress?

Budget Sequestration: Our Military Priorities

Do you remember the specter of the Great Sequestration of 2013?

It dominated the news headlines just a few weeks ago. The federal government of the United States was preparing to slash its short term discretionary spending budgets in an indiscriminate manner, an action that was necessitated by Washington’s inability to agree on a long term plan to reduce its budget deficit.

So … how did sequestration turn out? Well, at first glance, nobody seemed to have noticed it. Despite dire warnings of a steep slow-down of the national air traffic system, for instance, the industry appears to have adapted to the budget cuts in a “business as usual” manner.

But as time rolls along, the true costs of the sequestration process are becoming more apparent. For example, you’ll undoubtedly notice it if you decide to visit New York City next month.

Farewell, Fleet Week

Each spring, the Big Apple kicks off its warm weather tourist season with a celebration of the United States Navy. Fleet Week brings naval vessels up the Atlantic Coast, from bases like Norfolk, Virginia and Charleston, South Carolina, to spend several days in New York Harbor and on the Hudson and East Rivers. The sailors throw open their decks to the general public and join a series of festivals and special events.

Fleet Week was originally inspired by Operation Sail, a quasi-governmental organization founded by President John F. Kennedy to sponsor such events throughout the United States. Although the initial OpSail event in New York City was staged in connection with the 1964 World’s Fair, the most memorable one featured a Parade of Tall Ships that helped the metropolis celebrate the nation’s Bicentennial in 1976.

That was a year when America was still reeling from its defeat in the Vietnam conflict, the resignation of the disgraced President Richard Nixon, and the social, economic, and military challenges of the Cold War. The Big Apple itself was sliding into a severe financial and social crisis. Both the nation and the city desperately needed a shot of inspiration, and the OpSail event provided it with aplomb.

The recent Fleet Week versions of that historical OpSail event have attracted both military enthusiasts and casual tourists to the Big Apple from the four corners of the world. They’ve showcased America’s military forces in the best possible light, and have provided thousands of American sailors with the most enjoyable shore leave experiences imaginable.

Last week, though, the Navy announced that sequestration budget reductions will preclude it from joining the festival next month. Regrettably, that leaves the Big Apple with a Fleet Week in desperate need of a fleet.

Goodbye To The Blind

The recent Fleet Week announcement was a high profile one; it attracted the attention of commentators around the world. But the sequestration budget reductions are beginning to affect numerous low profile organizations as well.

How low profile? Consider, for the instance, the Cincinnati Association for the Blind and Visually Impaired and the Greensboro Industries for the Blind. The organizations employ a few dozen blind citizens — individuals who would find it difficult to remain employed in the mainstream work force — to manufacture supplies for federal governmental agencies.

Because of cutbacks in a Depression era government program that is now called AbilityOne, federal government officials have decided that they can no longer easily afford to purchase such supplies from local organizations that hire disabled workers. As a result, last week, the CABVI announced the prospective layoff of a few dozen employees who produce tape products for the federal government, following a similar announcement by the Greensboro organization about the loss of a military contract.

Shall we take a broad perspective to help us assess this situation? On the one hand, the United States Department of Defense is pouring resources into locales from Syria to South Korea to achieve its global priorities. Yet, on the other hand, it cannot afford to visit New York City in order to attend a party that is being staged in its honor. Likewise, it is unable to honor supply contracts with nonprofit associations that employ disabled American citizens.

American Priorities

Of course, there are many valid reasons for respecting such priorities at the Department of Defense. Our country undoubtedly continues to hold strategic interests in regions like the Middle East and the Pacific Rim; our military forces clearly help us protect these interests.

And our domestic organizations are proving to be managed by resilient and resourceful executives. Fleet Week organizers are already investigating the possibility of inviting local Coast Guard craft to help fill their naval void. And the president of the Greensboro organization is pursuing a T-Shirt supply contract with the military to replace the lost tape supply contract.

In other words, American citizens and organizations are continuing to devise creative ad hoc approaches to adapt to the Great Sequestration of 2013. Nevertheless, the outcomes of the sequestration process are revealing important truths about the priorities of the American people.