Foreign Policy Blogs

By the People and for the People – A New Approach to the U.S. Federal Budget!

By the People and for the People – A New Approach to the U.S. Federal Budget!

One of the primary responsibilities of any government is the management of the public purse: the government budget and the national debt.  As developments in Europe demonstrate, bad management of government expenditures could lead to financial collapse and government default.  Although the U.S. is in a much better fiscal footing then most European countries, dealing with the national debt has captured the attention of most politicians.

Democrats primarily want to raise taxes on the wealthier Americans (repeal Bush tax-cuts) and reduce the defense budget, in order to close the deficit gap.  Republicans on the other hand want to primarily reform entitlements (Social Security, Medicare, and Medicaid) which combined account for close to 45% of the Federal budget and will only get larger due to demographic changes.  Most likely, the right solution lies somewhere in between, which is what was the recommendation of the Simpson-Bowles Commission: raise some taxes, reduce some defense spending, and reform entitlements for future generations.

Unfortunately there is no guarantee that even if our current political leaders were able to adopt such a grand compromise, future generations would not commit the same ‘management mistake’ of past decades: cut taxes which reduces government revenues, while expand government spending through borrowing.  However, instead of looking for funding to cut and taxes to raise, there might be another way to restructure the federal budget in a way might have a more lasting impact.

Redefining the Federal Budget between Federal and State Governments

Republicans are right about one thing regarding the federal budget deficit and the national debt: it’s irresponsible for our society to leave beyond its means, and pass the burden to future generations.  And, just like in Greece, the cause of our increasing deficit and debt is more political than just fiscal: a system of governance that has concentrated too much power at the federal level, and therefore too far away from the people to appreciate the consequences of their political choices.  Until we are willing to acknowledge that, and consider the possibility of shifting both the funding and the responsibility to States and local governments, politicians at the federal level will always be tempted to keep spending and keep pandering.

The issue therefore should not be how to change the federal budget and reduce government spending – rather it should be how to better divide government expenditures in a way that more efficiently and responsibly empowers people again.  People need to appreciate the difference between truly national spending obligations, that impact the whole country, and more local/regional spending obligations.

What if we were to classify government spending based on the age of people, and then accordingly divide it between federal government and the state governments.  In general, we can divide people in two categories: those who cannot work (due to age, or some disability), and those who can work (of working age).

Federal funding for under 18 and over 65

Overall, people under the age of 18 and after retirement (over 65+) are generally consider as being not of working age.  Sure, some teenagers can work part-time at 16, and some adults can keep on working after 65, but overall people under 18 and over 65 will not be working.  They will also not be able to relocate if economic conditions on their current location got bad or where not good enough.  People under 18 and over 65, in general have to take the world as it is, and hope that those that government take their needs into consideration.

Therefore, the federal government budget should be realigned to focus on people “under 18 and over 65,” leaving most other funding needs to the States.  Healthcare and education for people under 18, and Social Security and Medicare for people over 65, will make the bulk of federal funding.  Also, what transcends state and national boundaries (defense, homeland security, transportation, foreign policy, and environmental protection and product safety) should also be funded by the federal government.

From a moral point of view, it is imperative that as a society we can guarantee that all children will receive at least equal educational funding and that our most vulnerable retirees (who worked their whole life and paid their fair share of taxes) will be taken care off.  Children raised in the Midwest, will go to college in the cost and may end up working and raising their families in the south – while ultimately retiring in one of the few states in the U.S. with the ideal retirement climate.  Only the federal government can deliver funding and services to these two age groups in a uniformly equal and comparable way throughout the country.

State funding for economic growth and employment

On the other hand, if the federal government could cover these major funding requirements (administration and delivery could still be performed by State governments), then the States would be free to pursue their own economic growth and full employment policies.  States will have to create employment by advancing state-specific economic policies, like targeted subsidies to relevant state industries, tax breaks and investment incentives, funding of higher education and advanced R&D, and start-up capital for local entrepreneurs.

States should have to compete with each-other, both for attracting the best workers and by promoting local business.  Similarly, people should demonstrate their approval or disapproval of State economic policies (and benefits provides) with their feat.  Labor mobility is what sustained the phenomenal economy growth of the 19th and 20th century, and it’s what is partially to blame for the stagnating EU economy.

Overall people between the ages of 18 and 65 are free to move about the country and pursue their ‘American Dream.’  They can change jobs, change homes, go back to school, or do nothing at all.  Adults between the ages of 18 and 65 will probably need less ‘education’ then children and less healthcare then retirees, but a lot more ‘economic development’ initiatives, subsidies and tax breaks that will create jobs and promote growth.

Also, if the federal government is covering the welfare cost of people under 18 and over 65, States should be free to decide for themselves how to handle healthcare, unemployment compensation, disability coverage, and housing assistance for their residents of working age.  The competition for skillful labor will encourage competition among the States to provide the best social safety net for their citizens.  This division will couple direct services (employment, healthcare, housing) with State governments and indirect services (defense, environment, transportation) with the federal government.

Restoring our Republic

The problem with our out-of-control federal spending is that it is happening at the federal level.  It’s easy to keep cutting taxes while letting spending grow at the federal level, because it’s very hard for average people to follow or influence the inner workings of the federal budget.  If most (at least discretionary) taxing and spending were happening at the State level, it would be easier for people to be more involved and more engaged.

The overall objective should not be to just cut government spending that might be very essential to a lot of people.  Rather, we need to find a way to bring the federal budget closer to the people.  Dividing spending between people of working age and those out of the labor market (due to age) might be a good first step.

 

Nasos Mihalakas is a Washington DC-based foreign policy expert and contributing analyst for Wikistrat.  You can find the full version of this article at: http://mihalakas.wordpress.com/

 

 

Author

Nasos Mihalakas

Nasos Mihalakas has over nine years of experience with the U.S. government as a trade policy analyst, covering U.S trade policy, globalization, U.S.-China trade relations, and economic growth through trade. Mr. Mihalakas holds an LLM from University College London, and a JD from the University of Pittsburgh, with a BS in Economics from the University of Illinois. He has worked for both a Congressional Commission advising Congress on the impact of trade with China and for the U.S. Department of Commerce investigating unfair trade practices. Mr. Mihalakas expertise's also include international trade law, international economic law and comparative constitutional law, subjects which he has taught as an adjunct professor during the past couple of year. Currently, he is an Assistant Professor of International Business at SUNY Brockport.

Areas of focus: China, International Trade, Globalization, Global Governance, Constitutional Developments.
Contact: [email protected]

Great Decisions Discussion group