I listen to politicians and pundits go on and on forever about how the government is going to solve the current budget crisis of mammoth proportions because the economy is down, revenues are down etc etc. I don't think any of these people we elected have a clue , and if they were on Wheel of Fortune, they would buy a Z and call it a vowel. Listen it is not that hard. The main problem is that they (politicians and the like) do not think of the Budget or Revenue as real money. To you and to me, when we talk about our household budget, we are talking about the money we earn from a paycheck and it is real , it is tangible and it has a beginning and an end point. We start off with no money. We earn money from work. We spend money paying bills. What is left over (if any) is a surplus, if none is left over, we are overdrawn and we owe the bank money.
The reason we can afford to think this simply is because it is not difficult to understand and it is real and it is effective to do it this way.
It actually is that simple.
Spend money you do not have and it is either credit (as in credit cards) or it is theft. Spend money from your bank account that you don't have in the bank and see what the bank brings charges against you for. Very easy to explain, very easy to understand. Real worry and real Pain happens when you do not have the money to pay the light bill or do not have money for groceries and you will get sued if you do not pay for the credit card. Trust me.
If you borrow more money to cover a shortfall this year, payments to cover this loan increase in future years. This debt increase may solve it this year, but will make it worse in future years as the payments towards the debt increase. This is much the same as running up a big credit card balance. Using a credit card may help you now, but later on when you have to start paying for it, you have to use real money to cover the expense. If you raise taxes to cover a shortfall in revenue, the folks who pay the taxes make reductions in other areas because it is real money and there is only so much of it to go around. The way we treat it is , if you raise my taxes, I take less of a vacation (for example) and your revenues from vacationers is less because I had less to spend, and I had to make a reduction somewhere. There is a defined amount of money to spend. This is what is known as the self-fulfilling prophecy. You make me pay more, therefore I have less to spend so therefore I spend less and you (the Government) still have less money to work with and the problem is not any smaller, it is just paid a different way.
Simple huh? I think if I can figure this out and you can understand it, then anybody can. I also think this is what average people do every day when managing real money.They need to treat the budget just like you and I do. They need to treat it like real money and they don't. They forgot that every dime they spend comes from you and me to begin with.
The Politicians would have you believe that it is a whole lot more complex than I've explained. The problem (at least at the Federal level) is if you run out of money, you either borrow more or you print more. At the State level you either borrow more or you try to raise taxes to cover the costs or you try to adjust the money you spend to meet the expected level of revenue. In all cases , they forgot to treat money coming in as real dollars and cents. Here is why none of the three things mentioned above actually work. It seems as if it does because of bookkeeping but it really doesn't because the issue never goes away and we keep hearing about it year after year. Using any or all of these methods just extends the problem into the future.
If you are the Federal government and you decide that you need more money and you decide to print more to increase the supply, it makes the problem worse immediately on two levels. First because the money supply is larger, every dollar in that supply is worth a smaller amount. Read this simple fraction explanation and you'll see what I mean. If you have one (1) of something and there is five (5) of them overall, then you have one-fifth of the overall supply. If you have one (1) of something and there is six (6) of them in the overall supply, then you have one sixth of the total supply. The amount you control is worth an amount smaller in the overall supply. When you hear about the cost of the dollar or how the dollar rates against a foreign currency, this is what they are talking about. Importing goods costs more because you have to use more of your money to pay for it. Second, because the value of the money you control is worth a smaller amount, you have to spend more of it to purchase goods and services. This is because businesses raise prices to be able to retain the same amount they are used to in order to make a profit at the level they need to continue to do business. This is called inflation. When you hear someone talk about "Buying Power" of money, this is what they are talking about.
The next thing they always try seems pretty logical, yet really is not a viable solution because it never takes fixed costs into account properly and it over values items which we cannot afford based on the revenues we have to work with. Certain things in any government budget just won't go down all that much when trying to reduce expenses by making cuts across the board. Things like the costs of housing prisoners cannot really be reduced. What are you going to do, Have less guards, or have less prisons to house the same number of prisoners? It is a silly proposition and it never works. Ever.
First, If the President or a Governor says to his staff "Reduce expenses by Ten Percent (10 %) in every department", they may make some changes, however they will never really make substantial change because they do not really control the purse strings. It sounds good on the News or in the newspaper, but makes very little difference because nothing is ever eliminated from the budget. You just end up with the same things at a smaller level.
Second, The Legislatures (or Congress) controls what is spent by appropriating funds to programs. If the head of State (The Governor or President for example) makes too many changes they then just re-write the legislation to make it a law to be enforced by the courts or take it away from the Head of Governments control. This is due to the influence afforded selected groups of people routinely called "special interests". You then run into the NIMBY effect. Everybody thinks we need a new prison or a new waste dump, as long as its NOT In My BackYard.
We would never have to cut the number of teachers, fire policemen, close fire stations or provide less Children's services if they had the guts to do one one thing right.
Every item in every budget should be assigned a priority in the budget just like you and I do. If we have less money, what do we do? We go to the movies less, We spend less money at Christmas, We take less expensive vacations, we buy cheaper goods instead of expensive ones. We don't reduce our spending across the board by ten percent, we eliminate expenses we cannot afford until we spend the required amount less. Here is what they ought to do , yet never will do, because of the influence of "Special Interests".
Lets say there are 2000 (two thousand) items in a State (or any Government) budget. There is probably more but lets say it is 2000. Put the highest priority items at the top and start with Number One (1) and then prioritize and number every one of them until everything in the budget is on the list, numbered One (1) through Two Thousand (2000) . Along with each item, list the cost of each item next to it. Now put the accountants to work and figure out how much real money we have coming in as close as we can figure it. Classify every budget expense as one of three things. One is a need (absolutely must have), next is a desire ( just would like to have), next is a want (Would like but could do without). Cut all wants first. If that is not enough, cut out the desires. If it gets bad enough, then you have to cut needs. If you absolutely must have all the needs, then you can raise taxes. Adjust each line item to the level on what is left to levels we can afford and if that is not enough, start with the last item on the list and eliminate it. Keep eliminating until you have your expenses at the same level as revenue. Understand , if we do this, we are going to eliminate things that would be nice to have, but cannot at this time afford to have. We may not be able to give block grants to build a new park or have some arcane study done concerning some state insect , but we would have teachers and etc at the level we have to have. I suspect if politicians would do this , we would never lay off a teacher or a firefighter or a Police Officer ever again. I also think if they would look at it like this, we wouldn't mind paying a little more in taxes, because we would know why it is necessary to raise them.
Politicians will never do this because they have forgot that their job is to represent us and not to do things that will ensure that they will get elected in the next election.
What do you think ?
Thankx for reading my rant !
bigmike
Visit my blog online at http://bigmikerant.blogspot.com/
I encourage you to leave your own comments or reactions to my rants (even if you don't agree with me) in the comments section on each post.
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