Thursday, February 4, 2010

The Federal Budget - An Introduction

With the FY11 budget coming it I thought I would do a blog about it. After looking it over, I decided to divide it into a series of blogs. So here are links to the four parts:

The Federal Budget - Spending Projections
The Federal Budget - Federal Debt
The Federal Budget - Social Security and Medicare
The Federal Budget - My Budget!

The first thing to understand about the budgeting process for the federal government is that it isn't anything like budgeting for a company or yourself. Definitions of terms are very important. So I'll try to define them as I go through. Some may argue that the budgeting process is designed to hide what politicians don't want us to see. This assumes that the federal bureaucracy is an calculating, efficient, well-oiled machine! This flies in the face of everything we see the federal bureaucracy (or any bureaucracy) do for that matter.

I am a firm believer in the idea that the government and its bureaucracy is slow, dim-witted, and wholly inefficient. Furthermore, I would postulate that this is exactly the way that the founding fathers intended. As such the government is incapable of "hiding" information from us. The best it can do is obscure it with their bumbling. They can't even do this very well.

Frankly, the two areas of government (politicians and bureaucrats) have competing interests based on a similar goal. Politicians, by and large, want to be re-elected (job security) and must hide information from the public that would hinder their ability to be re-elected. Bureaucrats want to keep their jobs, and in so doing must produce something to justify it. Their products (i.e. reports) invariably have the exact information that some politician doesn't want you to have. It may not be in the most convenient format, and it may be rather redundant (hence production of even more reports of the same, ergo job security).

The annual Budget Report is a perfect example of this. Year to year, probably about 50-75% of the report is identical. Once you get back to the historical tables (where comparisons can actually be made), you find that the same information is repeated about 30 different ways. And most of those show the complete ineptitude of the federal government.

Why is the federal government so inept and how can we make it efficient? Well, that assumes that you want it efficient in the first place. As I said previously, our federal government was designed to be slow and inefficient. The Founding Fathers did not want to have power focused at the federal level, but rather at the state level. As such, they gave a limited set of powers to the federal government. All others were reserved for the states or the people (note not given; rights can be delegated to a government by people; government gets all power from the people and therefore has no ability to take away rights, only infringe them; this is true for all governments throughout the world, those people who knowingly accept the infringements of their government are accomplices to it).

For about 100 years, the states guarded their powers jealously from the federal government. Unfortunately, through times of crises like the Civil War, World War I, the Great Depression, and World War II, those powers were ceded to the federal government by the states. This then increased both the amount of federal spending and the amount of federal taxation.

How we fund our government has radically changed. When the Income Tax amendment was passed one of the arguments for it is that it would only affect the rich (doesn't that sound familiar). When Social Security was enacted, it wasn't targeted to the entire population, only a small subset (the rich and their employees). In the last 75 years, how we fund our government has radically changed.

Based on the OMB historical numbers, in 1934 more than 70% of the government's receipt were through excise taxes, gift and estate taxes, and customs duties (except for estate taxes, all voluntary activities that one could choose to participate in). Approximately 15% of the government receipts were from individuals in the form of income taxes and social insurance or retirement taxes. By 1970, those roles had been reversed and in 2009, more than 80% of government receipts are from individuals and less than 8% are in the form of excise taxes, gift and estate taxes, and customs duties.

So read on in the series to see my thoughts about the federal budget.

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