At Last, Recognizing The Budget Constraint

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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(This article was submitted to The Washington Post as an Op-Ed on 01/26/2010, on the eve of the President’s State of the Union and on India’s Republic Day, India being my country of emigration to the United States, along with an email to my supervisor at the Federal Reserve seeking postponement of an accelerated performance review meeting to wait for an Inspector General investigation into my complaints against the Fed for a possible case of illegal government harassment of me. My wireless AT&T telephone bill exceeded $3000 during the billing period 01/26/2010 and 02/25/2010 with no satisfactory answers from AT&T for possibly hijacked phone calls against an internationally roaming phone number on my family account, with work-related factors between the Federal Reserve and the International Monetary Fund where my wife is an economist leading to my separation from my spouse.

The circumstantial evidence that the government harassment had become aggravated since I posted my first blog article on my blog beginning 12/24/2009 is evident in my AT&T wireless statement.)

American households face it all the time. So do many of the policymakers in their personal lives. It is called the finiteness of one’s income or more technically, in the economics profession, the budget constraint. Yet, the very same people, as if acting vicariously when they are elected to the nation’s office, when endowed with the power of the purse strings, spend what is not theirs as if it is. In time, they also got the rest of the country addicted to it, from consumers to Wall Street.

Some members of Congress had bounced checks which erupted into a national scandal some time ago only to be followed by households and the financial markets bouncing theirs because the culture had changed from one of thrift and savings to one of borrowing and spending. The budget constraint had become fungible as a matter of sociology. Suddenly, the total debt of a country that earns about $15 trillion a year is ten times that. Technically, it is called the notional value of a nation living on borrowed dime.

Finally, the government seems to have recognized the unsustainability of the country living beyond its means. The current president campaigned saying that people have gotten used to living high on the hog and that some sacrifice was necessary. Somehow, however, that sacrifice, until yesterday’s news that the government was going to freeze its non-security discretionary spending over the next three years, affecting about 17 per cent of the total federal budget, did not apply to the government.

As the Wall Street Journal had reported, it is likely that the increases in the remaining 83 per cent will eclipse the symbolic discipline. But at least it is a start. Still, a start to what? And can it be done better without parsing between the various kinds of government expenditures? The Journal is correct especially because what have been left out are national defense and the mandatory Medicare expenditures which are expected to be reduced if the current health care bill passes. Then why not include Medicare in the budget freeze?

Asking such questions would be an endless exercise between rival cabinet departments vying for budget appropriations. For the budget freeze, therefore, to have some teeth while preserving flexibility for the government to organize itself as the circumstances demand, it is best if the administration commits the Congress and future administrations to freezing the federal budget at its total FY 2011 nominal dollar level through FY 2021, over the next decade, with no indexation for inflation.

The government would then be constraining itself to working within that bound, which is the true budget constraint, not detailed appropriations by spending type. As a result, the budget as a percentage of GDP would go down over the same period because the GDP will rise and further, the government would be forced to be careful about inflation over the next decade to preserve its buying power. Meaning, the government’s commitment to freeze the total federal budget at the absolute Fiscal Year 2011 number through 2021, is a rule that will address both inflation expectations and the efficiency of government spending.

This much needed sacrifice by the government will ensure that those working for it, including the policy makers and the rest of the private citizens of the country do not have to sacrifice. Disciplined behavior by the government will result in the much needed private investment as the government recedes from crowding the market for both consumption and investment to only spend on what is needed (including effective regulation not provision of goods and services competing with the private sector), not what is wanted by the government.


About Chandrashekar (Chandra) Tamirisa
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