Rights 4 Sale

Some people believe in past lives.  Some people are curious about it.  Some people reject it completely.

Whether you believe in reincarnation or not, consider this:  what if you come back and live again.  Would your political decisions be different if you had to come back and live under the effect of what you decided today?

Some political decisions are easy to dodge by just not confronting them on the basis of “It doesn’t affect me; I won’t be around to see what happens”.  The thinking is that we let it slide off our backs onto the backs of the next generation.  They are the ones who will be here to deal with it.

An example would be Social Security.  Most seniors do not want to confront what will happen down the road.  They are happy to accept the benefits today and reluctant to fight for what it might mean to the next generation.  But what if you come back and have to grow up and live under the decisions that are made today.  If it was you (reincarnated) and at the effect of policy made today, you might might not be willing to stand back and spectate.  You might take action.

The massive unfunded liability of Social Security over the next few decades means a reduction in spending or an incresasein taxes – or both.  Unless something is done now, the liabilities will mature and there is no provision is place to fund it.

This is not to say you should believe in “past lives” or reincarnation.  That’s up to you.  But, it doesn’t hurt to think of the future as if you will be there.  You might not be as apathetic or ambivalent if it affects you (a theoretical reincarnated you) directly.  This “what if” is a way of side-checking your decision to support an issue or take action.

On the ouside chance you might come back, you might want to do something about some of the issues that face us today.

 

There is a discussion about whether health care or other benefits provided to individuals by the government are natural human rights or entitlements.  Right or privilege.   It’s a subject that people will probably debate for decades or centuries to come.

Without getting into this part of the discussion, let’s just talk about it from the dollars and cents point of view.

If you look at the federal budget, one thing jumps out.  The combination of mandatory and discretionary spending is more than the revenue causing a deficit.  So, we are already spending more than we make.  If we want to our government to give more, then we have to find a way to get some more money or spend less.

Just borrow the money?  The only problem with that is we pay more interest when the debt goes up.  Interest is part of the mandatory spending.  When interest spending goes up, there is less to spend on other mandatory items, like Social Security or Medicare or less to spend on discretionary items like defense, education, roads or law enforcement.

We could just print the money, but that would cause inflation which would defeat the whole idea of having more.

The only other alternative is raising taxes so there is more revenue.  Every time this approach has been tried, increased taxes lowered productivity or caused inflation.  Current estimates say that personal income taxes would have to be increased to 60% to cover the expected growth in Social Security, Medicare, Medicaid and interest spending.  It is doubtful that most people would put up with a 60% rate of income tax.

So, it’s back to square one.  Whether health care is a right or an entitlement, it is really junior to the question of whether we can afford it or not.  If we are going to pay for heath care, then we need to take something out of the existing budget or raise taxes. 

Proponents of the health care plan that is currently in the House and Senate say that we can pay for the new benefits by cutting existing costs.  Government programs have never been successful at lowering costs.  One might ask, if it’s so easy and so fiscally important, then why haven’t we done it already?

Let’s say that the typical person makes $1,000 per paycheck.  The taxes are approximately 20% or $200.  This leaves you $800 for necessary expenses like rent, utilities and food.  If you are lucky, these necessary expenses are less than $800 and you have some discretionary money to spend, invest, give away or save.

If government adds new benefits without reducing spending then they need more from you.  Suppose your fixed expenses are $800, then raising you taxes to $300 means that you need to make more money or reduce your expenses to $700.

So, let’s take it from the top.  As long as the government is taking in more than it spends, then it can spend the surplus on whatever benefits the people think are OK.   But, whenever the government spends more than it takes in, it needs to reduce services or increase revenue.  Translated, if you want more benefits, then you will pay more in taxes or government will have to spend less on some existing benefit.

The example above represents a typical American except that a typical American spends $850, but only brings home $800.  That means that the typical person has to borrow $50 per pay period through the use of a credit card or some kind of line of credit.

In the past, growing spending was obscured and hidden hidden behind a growing economy.  The same is true for individuals.  Growing credit card limits, growing debt or growing equity in real estate hid the fact that people were spending more than they made.

Now that we have an economy that is in recession, home values are decreasing and credit limits have has been reduced.  Meanwhile, federal spending is increasing while federal revenues have decreased.  The result is that there is less money in the federal coffers just like there is less money in your pocket.

Whether health care is a right or an entitlement may be purely an academic subject because there just isn’t enough money to pay for it no matter what it is.

 

 

The heath care plan, in almost any iteration you pick, is really the best pratical program for reducing carbon emissions.  Look at it this way:  increased debt will mean less discretionary spending on a personal level encouraging people to have smaller families.  This lowering in reproduction will mean less people putting carbon dioxide into the air in the future.

Looked at from a different point of view, health care rationing will decrease the number of people using the health care system.  This reduction will cause a corresponding reduction of people living longer and thus will bring down the level of carbon dioxide being released into the air.

As a green program, nothing holds a candle to health care in reducing the carbon footprint of humans.  For those who survive a delay or denial of health care, cost will rise dramatically, but the air will contain lower levels of carbon dioxide.  Since trees and plants use carbon dioxide, we will have to watch their tendency to flourish and prosper from the presence of more carbon dioxide.  Perhaps, as a prudent kind of “thinking ahead”, we should be prepared to kill targeted trees and plants keeping the precarious balance between carbon dioxide and oxygen.

Health care could be the ultimate answer to carbon dioxide.

 

Part of the success of the American Revolution was that, after the Revolution, people had confidence that it was safe to trade with or invest in the United States.  Consequently, trade with the US grew form year to year and allowed America to grow into a major economic force.

The value of any currency boils down to confidence that is will hold or increase its value.

The value of a stock boils down to the confidence that the company will perform in the future.

When you hire an employee, you do so with the confidence that he or she will do a certain job.

The popularity of a product is based on the confidence that is will fulfill wants or needs of consumers.

The popularity of a politician or political party or legislative bill is based on the confidence that there will be a net benefit for constituents.

In a more general sense, the economy is based on consumer confidence which is, in turn, is based on people’s outlook regarding jobs, disposable income, inflation, world events, politics and the real estate market.

Applied to the current economic situation; we will not recover until confidence is restored in the banking system, the real estate market and the job market.

 

Some of the criticism of health insurance companies is based on a gross misreading of the financial statements.  Service and manufacturing businesses have different ways of ways of reporting profit and loss based on understandable differences in how they operate.

A manufacturing business reports gross or net sales and then subtracts the cost of manufacturing the units that were sold.  The manufacturing cost is the sum of material, labor and factory overhead and is called the cost of goods sold.  What remains after subtracting the cost of goods sold is the gross profit.  The operating expenses would be subtracted from that leaving the net (per-tax) income.

A service business would report gross income and subtract payments and expected outlays to customers to get gross profit.  It doesn’t have a cost of goods that can be measure in material, labor and overhead.  Just like a manufacturing business, it would then subtract operating expenses to get net (pre-tax) profit.

The people who are most vociferous about health insurance profits typically take the insurance company’s gross profit number and misleadingly hold it up as the net profit number and then impute guilt for profiteering to the insurance business.  Leading people to think that the gross profits of a company are the net profits of a company is extremely dishonest.

This is not a realistic, apples-to-apples comparison with other companies.  Gross profits are good for measuring the strength or performance of a company within an industry, but gross profit is never a metric used in the financial market to measure the performance of the company, especially one business in one industry versus a business in another industry. 

Health insurance companies reported net profits in the 7% and 8% range which is below the average net profit for typical companies in the US which is about 12% (pre-tax).  Health insurance companies are not the most or least profitable in the public sector.

The statistics show that insurance companies are not making excess profits.

It is interesting that health insurance companies have a limited exemption from antitrust activity for 70 years.  While it would be illegal for other companies in other industries to do so, health insurance companies can get together and set prices or operate as a monopoly in a given state.

Health insurance companies have territorial protection, state-by-state protection and regulation, territorial restrictions, antitrust exemptions, medical malpractice considerations, waste and fraud issues and widespread pharmaceutical misuse.  It seems like a confused, contradictory word-salad.  It is hard to take any slice of the health insurance industry and hold it out as representative of the whole.  It is really important to view the industry as a whole and not fall for the demonizing propaganda based on half-truths that makes it into the mainstream press.

Is there any wonder that costs are escalating?  It’s time to throw out the system and build a new one.

When our country was founded, the laws were fairly straight forward.  All you had to do was read the Constitution and you knew where things stood.  In the first few years, the Congress passed a number of laws and the Supreme Court made decisions.  We also had common (British Law) to underpin and supply a background for our legal system.  It was simple in those days.

A lot has happened in 230 years and the laws and regulations have grown voluminous and complex.  This is no more evident than the Federal Tax Code.  With thousands and thousands of pages (60,000 pages), there are very few people who have a complete understanding of the Tax Code.  CPAs, attorneys and Enrolled Agents are expected to be experts, but it is doubtful that any of them could operate without access to extensive reference libraries.

Two states (California and Oregon) require tax preparers to be certified by the state.  These professionals probably understand simple tax returns, but utilize software and reference materials to handle the more complex returns.

Politicians and government bureaucrats don’t understand the Tax Code.  They have to consult with CPAs or attorneys or the IRS to get information.

Further evidence exists.  In tests, tax data was given to an assortment of CPAs, tax attorneys, enrolled agents and tax preparers.  Virtually none of them came up with the same results.  While many were close to each other, the bottom line varied drastically in some cases.  Can that be good – when experts all come up with different answers to the same problem.  Seem very subjective.

Without addressing whether we should have a flat tax or consumption tax, one thing is clear; the current system does not work.

The Tax Code provides guidelines for completing a simple tax return.  Add one complexity and you have to consult an expert or read pages and pages of instruction packed with “if/then” statements and complex calculations.  The bulk of the laws are there to provide loopholes for companies and people with above average incomes.

With a flat tax or consumption tax, we could do away with the IRS saving approximately $12 billion directly.  We would save additional billions (estimated at $300 billion) in tax preparation, planning and compliance.  We would also give executives more time to concentrate on business objectives rather than tax avoidance (not evasion).  The advantages are hard to ignore.

Some people argue that the tax rate should be progressive to give underprivileged families relief and to shift some of the burden to more affluent tax payers.  That seems OK, as long as nearly everyone makes some contribution.

There are other areas that have gotten too complex and it is worth some contemplation regarding how to reset the clock to simplify things so that the average person can understand it.  An idiot’s guide to laws, tax codes and regulations limited to 50 pages or so.

People can have different opinions about whether we should have a flat tax or a consumption tax, but the senior issue is that the Tax Code has become too complex to survive.  If it so complex that no one can follow it, then how fair or useful can it be?

 

• Hide expenses behind income.   When the income is $100 and there are $20 in expenses, just net the two together and show $80 in income.  That way, nobody will notice the $20 in expenses.
• Make it complex – there are over 4,000 budget items in the Federal Budget making it nearly impossible for any one person to understand.  With this many items, most of the detail will not be questioned because it is buried in the detail.
• Use on- and off- budget scheme.  Some items are on-budget budgeted expenses and other items are off-budget budgeted expenses.  Then there are unbudgeted receipts or expenses that can be on- or off-budget.
• Use transfers.  Rather than have transactions that are simply receipts or expenses, use transfers to cloud the issue regarding a transaction.  A transfer is not readily recognizable as income or an expense.
• Use Trust Funds.  Parking money in a trust fund or making people think you are parking money in a trust are both equally effective.
•  Divide expenses across multiple areas or fnctions.  For example, some FBI expenses are classifies as national defense expenses.  If you are looking at overall defense numbers, you won’t see the FBI numbers.
• Have “miscellaneous” or “other accounts”.  Just like filing, use miscellaneous or other as a designation to lump expenses into nebulous and obscure groups.
• Make up baffling names like “undistributed offsetting receipts” so that readers will be confused and they won’t know what this means.

• Have a complex system of budgets, approvals, appropriations and carryovers.  An item may be in the Presidents Budget, but it is not approved until Congress approves it by passing an appropriate spending bill.  The money is not disbursed from the Treasury until the proper appropriations authority passes a funding bill.
• Have a labyrinth of laws connected to each department that only a lawyer could understand and follow.  Any citizen who approaches the subject of government spending will be sent reeling by the layers and layers of complex laws surrounding any subject, agency or project. 
• Don’t publish a coherent complete budget with all the detail.  Always publish summaries and selected data that has less than the full compliment of details so that no one ever sees the complete picture.  Make sure that downloadable data can not be easily reconstructed by patching files together to get a complete picture.
• Be inconsistent in showing or not showing a branch of government in the budget.  Some budgets omit the legislative or judicial branches showing a smaller number.  Some comparisons can be slanted one direction or the other by including or excluding the other branches of government.
• Use cash method to hide future obligations.  Most businesses use the accrual method of accounting.  Certain accounting principles are followed which say that you recognize a liability as soon as you know about it and recognize something positive only when it actually happens.  By using the cash method, future liabilities are not recognized and do not show up on the books.  This situation currently exists with Social Security, Medicare and Medicaid.  The future liability for payments under these plans is reported to be $55 trillion. Looked at another way, unless there is a significant change is revenues, tax rates, program or spending, the US will spend an amount for Social Security, Medicare, Medicaid and Interest of the Debt that is equal to total revenue.  This would leave no money for nation defense or any of the other discretionary expenses need to run the rest of government.  Using the cash method hides future liabilities.
• Be inconsistent in showing supplemental items or show some part of an expense in the budget and show the rest as a supplemental.  The war in Iraq was funded as a supplemental bill, meaning it was not part of the budget.  Later it was included as part of the budget when complaints were forwarded by war protesters about hiding the cost of the war. 
• Be inconsistent in showing discretionary items or show some part of an expense as a discretionary expense and show the rest as a mandatory expense.  Some agencies or departments can have expenses in both discretionary and mandatory categories.  Budgets can then be constructed that show less discretionary expenses by not noting that some of the expenses reside in the mandatory section of the budget.

 

• Be inconsistent or vague about using real or inflation adjusted numbers.  Some times you can adjust past of future numbers for inflation, historical of predicted, and bring two numbers closer together.  This can be a useful tool for comparing competing ideas or budgets
• Never include exactly the same items more than once in a comparison.  Since there are so many items in the budget (over 4,000), always use groups of numbers consisting of different items, but never the same group so that a comparison will not reveal what actually happened.
• Use different subtotal points to create confusion.  By moving the point where you insert subtotals, you can make numbers look different, confusing the inquisitive.
• Be less than specific when adding notes or labeling.  Since numbers can be budgeted, approved, funded, on-, off-, inflation adjusted or subtotals, leaving off footnotes and important labels can lead people to infer wrong meanings and conclusions keeping them from discovering the truth about things like pork or frivolous spending of other people’s money.
• When you do a chart and you want the results to show an increase (line going up) but the actual results show a decrease (line going down), render the chart upside down so that people will think it is going up.
• Make sure that an expense is contracted so that the budget is classified as mandatory, but the outlay has obligation limits, so it is calssified as dicretionary making it nearly impossible to match budgeted money with actual money spent.

Look at the budget for a while.

If one saw a train wreck coming, one would probably feel a strong urge to warn the engineers of either or both trains.  It’s a part of our human nature to want to help others avoid danger, injury or catastrophe.

It is somewhat baffling that politicians refuse to see the coming entitlement problem.  Or, if they do see it, they refuse to act.  Some talk about it and acknowledge that it is unavoidable, but it is always described as something that we should really get serious about in the near future.

Let’s take it down to the basics.

A series of laws, passed in the last 70 years created the Social Security, Medicare and Medicaid entitlement programs.  Social Security and Medicare taxes have been collected for decades and have generally had a surplus – more taxes collected than benefits paid out.  Recently though, Medicare and Medicaid have paid out more than the revenue taken in, so they are operating in a deficit mode.  Social Security is about to go negative cash flow in the near future.

Traditional accounting rules say that you recognize bad news now, but you don’t recognize good news until it actually happens.  This is known as accounting conservatism and is designed to keep companies or entities from financial crisis.  When it comes to our national finances, we don’t practice what we preach.

The federal budget is calculated largely on a cash basis. That is, revenues and outlays are recognized when transactions are made. Things that happen in the future are ignored, at least in a budget sense.  The long-term costs of entitlement programs such as Medicare, Social Security, and the federal portion of Medicaid, are not reflected in the federal budget. By contrast, many business and some foreign governments have adopted forms of accrual accounting, which recognizes obligations and revenues when they are incurred. To exacerbate the problem, the costs of some federal credit and loan programs, according to provisions of the Federal Credit Reform Act of 1990, are calculated on a net present value basis which reduces the value of future dollars to account for the effects of interest and inflation.  This understates futures obligation.  In plain English, using cash basis accounting means that future obligations are not shown as budget items because they have not yet occurred.  While we have an enormous obligation to Social Security and Medicare/Medicaid, but we do not show them as a future liability.

Administrations play other budget tricks.  Some don’t show the cost of wars financed though special of supplemental appropriations.  Other administrations omit the cost of running the Legislative or Judicial branches of government, avoiding having to include the cost on the same piece of paper as administrative branch expenses.

Said another way, expenditures for Social Security and Medicare are growing at a faster rate than the economy.  In the past, potential problems in the budget were able to hide behind growth in the economy.  If congress passed a spending bill that was not currently supported by revenue, increasing income due to growth in future years was enough to hide the cost of the program.  Most spending is covered this way.  However, with the economy in the tank these days, there is not enough current income to cover the new expenses and increases from growth won’t be enough to cover it next year.

In terms of solutions, there are only three. 

The first is to increase tax revenues.  This is hard to do in a recession when business and individual profits are squeezed and unemployment and lower wages reduced the income form Social Security and Medicare taxes paid.  Those who favor tax rate reductions point out that tax cuts have a positive effect on business and actually increase tax revenues.  The political party that is in power now is philosophically opposed to tax cuts.

The second solution is to change the obligation.   This means redesigning Social Security and/or Medicare.  The main problem with this is that no politician wants to be associated with or responsible for a reduction in entitlements, especially when people paid it over the years with money out of their own wallets.  Said another way, people feel that they have paid for and have been guaranteed certain benefits and are entitled to receive them.  That’s why they’re called entitlements.

Third, and the most straight forward way to bring revenues and expenses in line with each other, is to cut expenses.  Discretionary spending is a mixture of very important budget items, like National Defense, and truly discretionary items, like providing Broadband Internet Services to rural America.  One is “need to have” and the other is “like to have”.  To give perspective to the size of the problem over the next 50 years, consider this:

• To solve the budget problem with more revenue, production of goods and services in the US would have to increase three times.  Under the current economic conditions, this is difficult to imagine.
• To solve the budget problem with tax rates increases, we would have to increase the personal tax rate to 60% to cover increases.  Currently, revenues run about 20% of production.
• To solve the budget problem with cuts in spending, discretionary expenses would have to be cut by 30% or so.

The practical solution to the problem is probably a combination of two or three of the above.  Any of the above is probably not palatable by itself mainly because people would consider it too harsh or unreasonable.  A 300% is production is not reasonable.  High tax rates are too harsh.   Cutting expenses 30% affects too many people’s pet projects or vested interest.

Another point that people often miss is that letting private enterprise produce some of these goods and services puts people to work, lowers government spending  and typically delivers these goods and services more efficiently (at a better price).  We should privatize a number of functions and services that are now a part of the bureaucracy.

But still, a train wreck is coming and action is required!  We need to ensure continued growth in the economy.  At the same time, we will probably need some increase in tax rates unless decreased tax rates increase productivity enough to bring revenues up significantly.  Probably, the most practicable action will be the significant reduction of discretionary expenses by a hefty percentage, even if only for a few years.

Many people have the viewpoint that congressional spending is out of control.  Many of the “expenses” are for superfluous things that are “social spending” or “pork” projects intended to reward supporters or gain reelection support.

Using the personal budget example, we can see to options available to our government.  If you make $1,000 and have taxes of $300, then you have $700 to cover expenses.  If your expenses are $600, then you have $100 of discretionary income to spend, give away, save or invest.  If your expenses are $800, then you need to find another $100.  You can work longer, get a raise in pay, get someone to give it to you or borrow it form the bank.  If you borrow the money without paying down the balance, then you have a new (and growing) expense called interest. 

It’s no more complicated than that.  The economics of the federal government are just the same.

A major problem with the federal budget is the deficit spending we are doing.  It is analogous to the example above where we spend increasingly more than we bring in, so we keep borrowing money and racking up interest expenses without ever bringing the balance (debt) down.  If the US continues to spend as planned, annual interest on the debt will grow dramatically and soon become the largest single (mandatory) expense in the budget.  Interest on the debt and required payments to Social Security, Medicare and Medicaid make up 83% of our spending and cause the problems described above.  Sometime between 2030 and 2040, mandatory spending will exceed government revenues as shown above.

So, to summarize:

• It is obvious that there is a train wreck coming.
• Congress and administrations have buried their heads in the sand for years.
• The solutions are to:
  • Increase productivity which increases profits and then taxes.
  • Change tax rates to increase tax revenues.
  • Change programs to reduce benefits
  • Reduce discretionary expenses so there is money left to pay for entitlement benefits.
  • Some combination of all these actions.

The most practical solution is to reduce discretionary spending by 30% (an estimate) until the problem is behind us.  Raising tax rates to 60% or reducing entitlements are not popular remedies.  Cutting discretionary spending is not more popular, but (with pain) is the most practical path to follow.

It is possible that a runaway great economy would provide a suddenly convenient solution to the budget problem.  The more likely scenario is that, without changes, revenues will be around 20% of goods and services produced and that mandatory spending will exceed 20% sometime after 2030.  

A train wreck.  Time to do something about it!

 

 

 

The federal budget is easy to understand. 

 It could be summarized as follows:

Revenue                                                          $2,666 Billion

Mandatory Spending                                      $1,778 Billion

Remainder for Discretionary Spending            $878 Billion

Discretionary Spending                                  $1,114 Billion

Surplus (Deficit)                                             ($236) Billion

That means we spend $236 billion more than we take in.

Not only do we spend more that we take in, the most frightening aspect of the future budget is that Social Security and Medicare increase rapidly in the next few decades.  This poses the unavoidable question of fiscal stability for the “out” years (“out” means years that are about ten or more years away).  Unless revenues go up significantly or expenses are curtailed dramatically, we are headed for a financial train wreck.

But, let’s keep it simple.  The federal budget is just like your home budget.  If you make $1,000 and they take out $300 for taxes, then you have $700 left over to pay for expenses.  If your expenses are less than $700, then your have disposable (discretionary) income which you can give away, spend, invest or save.

If you repeatedly have expenses more that $700, you have to lower expenses, work more hours, make more per hour, get the money gifted to you or borrow it from somewhere.  Borrowing creates a new expense called interest (sometimes also called a service fee or an annual fee).

If you found yourself in a deficit position where your expenses were more than your income, you would try to increase your income, but you would probably also prioritize your expenses and cut out or delay those least important to your survival.  This may be a traumatic process.

It is the same with the federal government – we have a deficit situation which means that we are bringing in less that we spend, so we need to increase revenue while we prioritize expenses and cut out or delay those expenses that are (discretionary) not necessary to our survival.  It may be a traumatic process.

Here is the breakdown:

Using 2008 numbers, the US Federal revenue looks like this:

 

	(Billions)	% of Revenue
Revenue:
Individual income tax	$                   1,250.0	46.9%
Social Security and other payroll tax	$                      927.2	34.8%
Corporate income tax	$                      314.9	11.8%
Excise tax	$                        68.1	2.6%
Customs duties	$                        29.2	1.1%
Estate and gift taxes	$                        25.7	1.0%
Other	$                        50.7	1.9%
Total Revenue	$                  2,665.8	100.0%

 

In normal economic times, the revenue increases from year to year.  In fact, government depends on this “growth” and usually spends it in advance of actually collecting it.  This becomes a problem when the economy slows down or changes in laws or regulations dampen productivity.  Solutions to larger “budget-busting” entitlement programs like Social Security and Medicare have been postponed to future years or future budgets by every recent Congress.  As a side note, we are running out of years to which we can postpone the Social Security and Medicare problems.

The mandatory (by law) expenses for 2008 are:

 

	(Billions)	% of Revenue
Mandatory spending:
Social Security	$                      608.0	22.8%
Medicare	$                      386.0	14.5%
Medicaid and Children’s Health (SCHIP)	$                      209.0	7.8%
Unemployment/Welfare/Other mandatory spending	$                      324.0	12.2%
Interest on National Debt	$                      261.0	9.8%
Total Mandatory Spending	$                  1,788.0	67.1%

 

Like your home budget, there are some things that are mandatory expenses.  In your personal budget, rent, taxes, and food are probably the most important followed by utilities and insurance.  Cable TV and entertainment are probably not mandatory and you use discretionary money to pay it.

The size of the National Debt determines how much interest we pay, so it is preferable to most people that we reduce the National Debt and have a corresponding reduction in interest expense. 

When we calculate how much federal revenue is available to pay for discretionary expenses, we find:

	(Billions)	% of Revenue
Balance Left for Discretionary	$                     877.8	32.9%

When you subtract $1.7 trillion in mandatory spending from $2.6 trillion in revenue, you get $0.9 trillion ($877.8 billion to be exact).  About two thirds of the revenue is needed to pay mandatory expenses.  About one third of the revenue is left over for discretionary spending.  Covering the same point as before, Social Security and Medicare will rise significantly as the population ages and could easily outstrip revenues.

Other significant budget items exist that were not present in the 2008 budget – TARP, TALF, Economic Recovery Act, Iraq War, Afghanistan War,  2010 Budget – and significantly impact the budget.

Discretionary spending for 2008 is summarized below:

 

	(Billions)	% of Revenue
Discretionary spending:
Defense	$                      481.4	18.1%
Global War on Terror	$                      145.2	5.4%
Health and Human Services	$                        69.3	2.6%
Education	$                        56.0	2.1%
Veterans Affairs	$                        39.4	1.5%
Housing and Urban Development	$                        35.2	1.3%
State Department and Other International Programs	$                        35.0	1.3%
Homeland Security	$                        34.3	1.3%
Energy	$                        24.3	0.9%
Justice	$                        20.2	0.8%
Agriculture	$                        20.2	0.8%
NASA	$                        17.3	0.6%
Transportation	$                        12.1	0.5%
Treasury	$                        12.1	0.5%
Interior	$                        10.6	0.4%
Labor	$                        10.6	0.4%
Other On -Budget Discretionary Spending	$                        51.8	1.9%
Other Off-budget Discretionary Spending	$                        39.0	1.5%
Total Discretionary	$                 1,114.0	41.8%

 

While many of the expenses above could be considered essential, they are discretionary in budget terms. 

Returning to the personal budget theme, we have just a few choices.  We can increase revenues by increasing productivity (which is taxable) or raise tax rates, or we could do a combination of both.

On the expense side, it goes without saying that we could or should reduce expenses.  This is probably the most likely scenario.   We need to prioritize expenses and then not spend the money that exceeds revenue.   If we can increase revenues, that’s great, but the spending needs to be brought inline with the revenues, whatever they are.

This could be a traumatic process only topped by living a country like the US while it goes bankrupt.  That would be even more traumatic.

In review:

Revenue                                                          $2,666 Billion

Mandatory Spending                                      $1,778 Billio

Remainder for Discretionary Spending           $878  Billion

Discretionary Spending                                  $1,114 Billion

Surplus (Deficit)                                             ($236) Billion

 

We need to increase revenue and/or reduce expense by a net $236 billion.  Mandatory spending and discretionary spending total 108.9% of revenue, so we need to reduce spending by 8.9% (approximately).  On a larger scale, we need to structure our budget for future years and account for Social Security, Medicare and any other entitlement or spending programs passed into law.  This may mean restructuring Social Security or Medicare or other programs so they don’t bankrupt the country.

This also elicits a discussion about fundamental philosophical beliefs.  In any discussion about economics, we are confronted with the concept that we have more needs and wants than we have resources.  We would all like to drive a Ferrari, but some people would rather buy a house or don’t want to devote all of their disposable income to just one expensive car.  It’s an economic decision.   It’s the same with government provided services.  We may think that the government should do this and the government should do that, but it all costs money and we may not want to give up this to get that.  We may be willing to pay taxes to pay for one thing, but not another.  It’s an economic decision.

The main point is that some expenses and entitlement programs are more discretionary than others and we need to prioritize expenses or raise tax revenue until we don’t have deficit spending that will bankrupt the economy.

Some think irresponsibly that the government has bottomless pockets and should pay for every conceivable entitlement.  The fundamentals are contained above.  We have revenue that is dependent on productivity and tax rates.  We have expenses that are mandated or discretionary.  If revenues exceed expenses, we have a surplus.  If expenses exceed revenues, we have deficits.  There are other factors like government stimulus, international market dynamics and monetary policy, but the fundamentals are still the most important.

 

A lot of people assume that they know what a co-op is.  Co-ops have been around for two centuries and the knowledge of how they work is extensive.  There are quite a few co-ops in existence for everything from electrical power production to grain sales to health insurance.

Co-ops have a reputation for not working very well for most activities and working well for just a few specialized needs.  There are many different structures for co-ops.  If we assume that a government run health co-op would function a certain way, based on a past definition of co-ops, then it’s jumping off a cliff without looking.

With regard to the current discussion about health care co-ops, there are some drawbacks to the co-op solution.

While the current structure of co-ops favors its own members with group discounts and not-for-profit operation (which reduces costs), nothing says that the government can’t put new rules into place.  The government could regulate who owns the co-op, how it’s operated and how it goes forward.   There is no rule that prevents the government form controlling the operation of the health care co-ops.

The second concern with co-ops is that they need all of the elements of competition for the market in which they participate.  A power plant co-op needs a way the generate power (power plant), a means of distribution, sales and marketing and executive, management and administrative functions.

When we think of health care co-ops, the same applies.  To be competitive with private insurance companies, a co-op would have to have a network of doctors and providers, a defined schedule of service and a means of distribution, sales and marketing and executive, management and admin functions.

Thirdly, statistics say that insurance companies reported an average of 3% after-tax profit.  A co-op is operating without profit (or the profit is distributed to the members), but probably has the same operating costs as a private company.  It can be deduced, then, that a well-run co-op would have a 3% financial advantage over private insurance companies.  If it was not as efficient as a private company, the co-op might have the same or higher costs.

A co-op can be whatever the lawmakers want it to be.  The congress can determine how it will be financed, how it operates and all of the rules regarding the services it delivers.  Given the desire to reduce cost and increase efficiencies, there is little doubt that the lawmakers would not heavily regulate the whole area.  Assuming that it operates as efficiently as a private company, it would have a 3% advantage in costs.  Murphy says it will be less efficient as a government organization compared to a profit-motivated company and will have the same or higher costs.

With so little advantage, one wonders why we would want to introduce co-ops into the health care mix.  Lowering the cost of health care and expanded coverage could be addressed through regulation, tort reform, Medicaid extension and increased fraud enforcement.