Hey Congress! Why don't you fix the way you track how you spend our money?

08/01/2011 5:11 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The U.S. budget is broken.

No, no, I don’t mean that the U.S. is deeply in debt, so deeply that some wonder if we can ever dig ourselves out. And I don’t mean that our annual deficit, an estimated $1.65 trillion for fiscal 2011 year, threatens to soar even higher.

No, I mean that the actual federal budget, the mechanism that’s supposed to tell us whether our finances are in good or bad shape, and whether they’re getting bad or worse, is broken. It doesn’t give us an accurate picture of our financial health now. And as for giving us guidance for where we’re headed, well, it’s like using a meat thermometer to tell the weather, like timing a soft-boiled egg with a sun dial, like deciding what to wear by looking at average daily temperatures, like….

Don’t get me started.

As a result the entire battle over raising the debt ceiling, cutting the annual federal budget, and even, maybe, raising taxes (excuse me, enhancing revenue) is a battle fought between two armies blundering across the landscape wrapped in the deepest Scots haar fog and whacking about with their claymores at friends, foe, and innocent sheep alike.

And a balanced budget amendment? Nobody can possibly decide whether or not it’s a good idea, a disaster, or a harmless joke with the present state of our governmental budgeting. To start with what do the terms “budget” and “balanced” even mean in Washington right now?

Okay, enough of a rant. Let’s get down to brass balance sheets. We can start with those definitions for “budget” and “balanced.”

Look at the scorecard constructed by the Congressional Budget for President Barack’s fiscal 2011 budget.  Revenue, estimates the CBO, will come to $2.27 trillion. But note that only $1.7 trillion of that is “on-budget revenue” according to the CBO. The budget office calls the other $570 billion “off-budget” revenue.

The same terminology turns up on the spending side. On-budget spending amounts to $3.2 trillion with off-budget spending adding up to another $497 billion.

If you’re looking to balance the something called THE budget, what numbers do you look at? And what is off-budget spending anyway? Turns out most of it comes from the collection of Social Security taxes—revenue—and payment of Social Security benefits. That money goes into and flows out of the Social Security Trust fund and doesn’t get counted as part of the budget. Although as you know if you’re following the current debate about the debt ceiling, Social Security checks do seem, strangely enough for an off-budget item, to come out of the U.S. cash flow. (Other off-budget items include the U.S. Postal Service. Some spending can move between off- and on-budget. The costs of the Iraq War were initially covered through special emergency appropriations, for example, and weren’t part of the official budget.)

So let’s say you define what you mean by budget, maybe by putting all the off-budget items on-budget into what’s called a unified budget. You’ve still got another problem definition. What do you mean by “balanced”?

Let’s say, it’s the 1990s and the Social Security Trust fund is taking in more than the government is paying out. That was true during much of the Clinton presidency. But you know that this is just a temporary situation. As the Baby Boomers continue to age, the time will come when the trust fund is taking in less than the government is paying out. So considering the absolutely predictable future obligations, when is the budget balanced?

That’s a problem with the expected. Now how about the unexpected? Hurricane Katrina made landfall near New Orleans at the end of August 2005. By October 2005 Congress had appropriated $62.3 billion in supplementary spending for disaster relief and recovery. Even then, voices in Congress argued against that spending because it would increase what was seen at the time as an already large deficit.

Or how about the expected unexpected? I mean the business cycle. We know—or at least everyone but Alan Greenspan knows—that the economy will go through boom and bust cycles. During the boom tax revenues will soar and expenditures for some things—unemployment benefits, for example, will fall. If the government does nothing to change spending—such as passing a huge tax cut—the budget will move toward surplus. During the bust years, tax revenues will fall as the economy slows and the costs of things such as unemployment benefits will climb. The budget will move toward deficit, especially if the government decides that the downturn is severe enough to justify increased spending on infrastructure projects, say, or tax cuts or credits to spur hiring.

We know from the history of the Depression—from the budget balancing efforts of President Hoover and in the very earliest part of President Roosevelt’s administration—and from the 1937 relapse into Depression—that balancing a budget during a downturn—which requires cutting government spending, makes the downturn worse. When the bust in the cycle produces what some economists call a demand recession—when private demand for goods and services fall—increased government spending on goods and services can lessen the depth and duration of the downturn.

So is your definition of a balanced budget one that is always in balance no matter what strikes the economy? Or something else that says “emergency” spending is okay, even if it puts the budget into the red? (And then, of course, you have to define “emergency.”)

And let me throw one more element into the soup. All government spending isn’t the same although the current budget treats it as such. There’s a huge difference between spending money to pay salaries for government workers, for example, and spending money to build a highway to somewhere or to expand the port of Charleston so it can handle the bigger ships coming through an expanded Panama Canal. One is spending—however good and noble the cause—that covers a temporary cost. Once it’s spent, the government has to turn around and do it again tomorrow. The other is actually an investment that will pay dividends if not to the government then to the economy as a whole. Nobody argues that when General Electric or ExxonMobil invest in a new factory or a new refinery they shouldn’t do so if they have to borrow the money. As long as the return on the investment is higher than some hurdle rate, then borrowing the money actually makes sense.

I’d call the changes that our budget needs—at the least a division into investment and expenditures, a counter-cyclical scoring system that defines “balanced” in the context of the economic cycle, and a unified budget that gets rid of the deceptive practice of pretending that some expenditures of taxpayer money don’t count because they’re off-budget—pie in the sky except that a few other countries around the world have created budgets like these.

Chile, for example, has dealt with the harsh realities of being one of the most cyclical economies in the world—that’s what happens when your economy is dependent on copper—by creating a government trust fund, financed by a tax on copper that rises and falls with global copper prices, that is available during years of economic bust. A system of independent panels of independent economists rules on when the economy has entered such a bust and that decision authorizes the government to dip into the economic stabilization fund.

Norway, faced with the reality of a huge surge in revenue from North Sea oil and the realization that this resource wouldn’t last forever, created a sovereign wealth fund designed to take some of the cash flow from that inevitably declining resource and invest it in the future either in projects that would produce income in coming years or in investments designed to create new jobs or improve the competitiveness of existing Norwegian industries for the day when the oil ran out.

It’s hard for me to see a reason that Chile and Norway can create budgets like this and the United States can’t. (A few more weeks of watching Congress in action, though, and I’d be willing to entertain the notion that Chileans and Norwegians are just smarter than we are. We did elect this circus, after all.)

American families make these kinds of decision in their own budgeting. We borrow to put a kid through college because that kind of deficit spending makes economic sense. I don’t buy season tickets to the Yankees, as much as I like baseball, because I’ve got a new business that needs all my capital—and then some. My neighbors have worked hard to maintain a great credit record and have used that recently to refinance their mortgage, cutting their month interest payments by more than a third.

When I hear the politicians try to score points by creating some simple-minded cliché of the American family sitting at their kitchen table and deciding to “live within their means”—by not sending Johnny to college and by not helping Janie finance her business, I assume—I feel really angry. American families do better than that. They make distinctions between good spending and bad. They understand what it is to invest—even if it sometimes means taking on debt. And they put money aside for a rainy day—even if sometimes the rain turns into an unexpected flood that overwhelms those preparations.

The federal government should do at least as well. It should start by changing how it keeps track of the way it spends our money. Do that and then we can talk about what spending needs to be cut and how to balance a budget in a way that actually means something.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

 

Related Articles on STOCKS

Keyword Image
11 Reasons to Buy Microsoft
16 hours ago

For our latest recommendation, we revisit one of the world's most prominent technology companies, Mi...

Keyword Image
A Trio of Top-Tier Biotechs
16 hours ago

We hold three biotech stocks in our growth portfolio — Biogen (BIIB), Bioverativ (BIVV), and R...

Keyword Image
Saudis, Oil and ETFs
16 hours ago

Under the guise of clamping down on “widespread corruption,” Prince Mohammed bin Salman ...