A Pragmatic Approach for Deficit Reduction

I have a friend who is a farmer. He was raised with traditional economic pragmaticism. When it comes to managing his farm, he always says, “If you have to borrow money to pay for it, then you can’t afford it.” His common-sense approach is in contrast with prevailing American views.  Most businesses today, do it differently. Their goal is to maximize return on investment (ROI). If a farmer can borrow a loan at 3.5%, and then turn that into a 10% profit, their ROI becomes 6.5%. The downside is risk. Borrowing money for ROI is the same thing as gambling. When the farmer fails to achieve a minimum profit due to inaccurate estimates, based on many things that were never under his control (i.e. weather), than that farmer experiences a deficit. Most business owners would agree, occasional deficits are to be expected. That is part of being a business owner. Some years are better than others. The problem occurs when yearly deficits come in waves, or when he fails to set aside a strong year’s profits to better prepare for the storms ahead. When a farmer experiences multiple years of deficits, then the money he borrowed at interest, compounds the problem, and that debt quickly grows, decreasing cash flow, and increasing the total revenue required to break even. America is the farmer who routinely borrows, at high interest rate, but fails to meet ROI projections. They are like a farmer who has had deficits for 51 of the last 60 years, and unlike large corporations, they are not able to declare bankruptcy and wait for a government bailout. It is clearly time for American politicians to consider a more pragmatic approach to federal spending.

Macroeconomics is a confusing and politized subject. In simple terms, a deficit occurs when you spend more money than you make. For the federal government, this means increasing government spending without equally increasing government taxes, the sale of treasury bonds, or other revenue generating activities. In the past, Democrats and Republicans have universally agreed, federal deficits are a bad thing.  The difference lay in the proposed solutions, with conservatives supporting free market ideals in contrast to a liberal re-distribution of wealth. While Democrats advocate to raise taxes to increase revenue, Republicans insist on lowering the growth of spending. Conservatives further argue that lowering taxes, increases wages, thereby increasing tax revenue. Since no political party could advocate for raising taxes on the majority, and expect to be elected, Democrats have targeted corporations and the top 25 percent of wage earners.

In recent years, many Democrats have abandoned deficit and debt concerns altogether. This seems preposterous, especially considering the record $3.1 Trillion deficit of 2020, which will undoubtedly pale in comparison to 2021 and President Biden’s first year in office. Democrats argue their understanding of economic fundamentals has changed, and that it is not just rhetoric intended to justify a hopelessly expensive policy agenda. Their argument usually asserts, since the U.S. has routinely had federal deficits, and nothing catastrophic has happened yet, then perhaps nothing catastrophic will happen at all. More likely, the real motivation is from the expediency of dismissing deficit and debt concerns, rather than debate the issues, or use any kind of cost-benefit analysis for economic policy development.  Contrary to what they might say, liberal economists do not actually believe deficits are inconsequential. They are crossing their fingers that low interest rates and stagnate inflation, due to sluggish worldwide economic growth, will continue. But the elephant in the room, is that inflation is already on the rise, and interest rates will inevitably follow.

However, Democrats are not the only ones to blame for uncontrolled government spending. Republicans too, have been guilty of increasing deficits. Although they have often succeeded in cutting taxes, they have overestimated the revenue gains from economic growth, and have failed to even remotely live up to their spending cut promises. It is true that tax rate cuts result in economic growth, higher wages, and therefore, higher tax revenues, but lowering taxes will never solve the deficit crisis.

I learned long ago in the military, that you should never identify a problem without offering a solution. Here are two ways conservatives can address the deficit: first, Republicans should fulfill the fiscally conservative promises they make when they run for office, regardless of momentary populists’ policies. Second, a balanced budget amendment is the surest way to rein-in debt and reduce deficits. A budget amendment would require a cap on total spending and a limit on total revenue. It would require a move toward more free market ideals. Provisions would allow flexibility in time of war or economic recession, but approval by a supermajority of congress would help ensure monetary constraint. Politicians would no-longer be empowered to bail out big corporations and corporate donors. The bottom line is that the only way to reduce the deficit is to change the way politicians view money. Political leaders would be wise to follow the example of pragmatic farmers; “If you have to borrow money to pay for it, then you can’t afford it.”

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