Government Budget Catch 22

Catch 22: describing a set of rules, regulations or procedures, or situation which presents the illusion of choice while preventing any real choice. source: wikipedia.org

Before we get to the Government Budget Catch 22, let’s talk Aesop.

Photo By Cindy47452 http://www.flickr.com/photos/cindy47452/
Photo By Cindy47452 http://www.flickr.com/photos/cindy47452/

One of Aesop’s fables: The Ant and the Grasshopper teaches the moral of hardwork and saving our food during the summer feast-time to support ourselves during the winter famine time.

Now let’s apply this moral to our Personal Finances.  Personal Finance experts everywhere all recommend to pay yourself 10% first at the very least.  In other words, if you make $1000 for that week, you should save $100 into an account for either emergency purposes or wealth creation.  So, during the economic boom-time (Summer growth), you’ll grow your savings.  When the inevitable recession cycle hits the economy (Winter famine) and your income slows or worse you lose your income, you can use your emergency fund to live comfortably while you wait for the next summer growing season or economic recovery.

It’s great, but many Americans have not practiced this fable, and consequently, have instead of saving during the feast of the recent economic bubbles, been spending even more money than they had.

How does this apply to government budgets?

What is a Government Budget Catch 22?

First off, How does the Government get money?  What’s the income?  In general, income is from taxes.  Whether it’s the local township offices or the federal government, they make money by taxing us.  Now, taxes could be in the form of income taxes, property taxes, sales taxes, but they could also be in the form of speeding tickets, fines, and other legal enforcement opportunities.

So, if the government wants to increase income, they need to increase taxes. Where do they spend these taxes?  What is the Government budget expenses?  Well, the government provides services.  For example, the government may contract out the snowplowing of your streets or clean-up of downed trees.  There’s also taxes for schools and for research and development.

Now, during boom-time, the businesses start making more money.  They in turn often pay their employees more money.  So, the government, as a percentage, starts to make more money.  What do governments do with that more money?  Often times, they spend it on new services or projects that may or may not need funding.  Occasionally, the governments will give tax breaks, tax cuts, or other incentives back to the taxpayers.

Here’s the government budget catch 22: Governments are usually not able to save income for rainy days.  So, during the economic bull market, when Aesop’s ants will be saving.  The government can’t.  It’s either against the law, or its politically difficult to take what is perceived as unnecessary tax moneys.  Surpluses in the government is not accepted.

So, what happens?  During a recession as all capital markets follow the economic life-cycle, money tightens up.  Businesses stop spending and lay-off employees to cut expenses.  These newly unemployed now have to cut their spending.  The GDP retracts.  It’s famine time in the winter, the government’s income is now smaller, and all those great programs and services everyone fully expects to take advantage of like say social security, medicare, or just plain picking up the trash twice a week at the curb now need to be cut back to once a week.  The problem with this is the average citizen wants, no, expects these services to continue.  So, governments, instead of being fiscally responsible and upsetting constituents, will cut back only minimal services and begin to go into debt or deficit spending.  Governments mortgage the future to keep services running now, all because the Government can not follow the moral of the Ant and Grasshopper fable. Of course, the governments state during the next summer feast economic recovery, we’ll pay off that debt, but newly elected officials with newly elected promises to their constituents often times forgo the debt reduction in favor of pleasing their electorate.

What’s the solution?  Good question.  I hate to criticize without offering some soft of solutions.  I think I get that from my Solution oriented business upbringing throughout my career.

Solving the government budget catch 22.

Photo by:  No Middle Name, www.flickr.com/photos/93444913@N00/355588920
Photo by: No Middle Name, www.flickr.com/photos/[email protected]/355588920

We act as ants instead of the grasshopper in Aesop’s fable.

We could force deficit reduction policies that require surplus income in feast times to reduce our government deficits and debts.

We could learn to do for ourselves rather than blaming others and expecting the government to provide the services.

We could require funding of programs to support the planned expenditures and prevent swiping funds from one “over-funded” program for funds in an area that is “under-funded” pork project.

We could encourage savings rather than spending. Although, we have to be careful about that, because capitalism is not built on saving.  It’s built on spending at least right now it is.

Obviously, it is a complex question and requires more thought and time than my few sentences above.

What I do know is if we continue this current vicious cycle, we’ll just continue to get taxed more and continue to grow government services, and continue to dig deeper and deeper and deeper until we get so deep that we’ll just have to pay the piper.

What do you think?  Any solutions to the government budget catch 22?