Facing Reality on the Oregon Budget

Full 22-page pdf report
Facing Reality: Ideas to Reset Oregon’s Budget and Recharge Its Economy

By Americans for Prosperity and Cascade Policy Institute

Executive Summary
The immediate effects of the most recent recession have hit Oregon especially hard. Declining incomes, diminished job opportunities and depressed property values have stalled spending and shrunk savings. In addition to these immediate effects are the longer-term effects that are just now being projected. State government in Oregon will emerge from the recession with reduced revenues and a reduced potential for economic growth to sustain the rates of state government spending growth enacted prior to the recession. The most recent revenue forecast projects general fund revenues to be $1.27 billion lower than forecast at the end of the 2009 legislative session. Last year, Oregon Governor Kulongoski declared, “Oregon cannot continue to fund public services at the levels funded today.” Rather than make minor revisions, Governor Kulongoski argued a “reset” is necessary, charging that “we must re-think the way we deliver the services provided by state government.”

We agree with the Governor’s statement above. However, we reject the notion that budget deficits are determined by subtracting expected revenue from wished-for state spending. Instead, we propose what we call Reality Based Budgeting, beginning with the concept of a state spending limit such as that proposed through Measure 48 on the ballot in 2006. If that attempt to rein in state spending growth had passed, the 2011-13 general fund budget would be roughly inbalance without taking any drastic measures. It did not pass, of course, so we propose a series of cost cutting and revenue enhancing measures that do not include raising income taxes. Together, these measures should close what we believe is a more “realistic” budget gap of about $2 billion in the 2011-13 biennium. Moving forward, the “reset” in state budgeting should include adopting a spending limit similar to Measure 48. Coupled with efforts to recharge the state economy, such as permanently repealing the state’s capital gains tax, we see not a decade of deficits, but a decade of growth and prosperity.

Our ideas to cut state government costs or to enhance state revenues fall into four broad categories: privatization, reduced program costs, reduced transfer payments and tax credits, and reforms to public employee compensation.

These ideas are only a subset of opportunities for Oregon to face its fiscal challenges and to rethink the core services the state provides, the costs of state services, and the ways in which services are delivered. We view these ideas as a starting point for an ongoing conversation.

Click here to read the full report.


Americans for Prosperity (AFP) is a nationwide organization of citizen-leaders committed to advancing every individual’s right to economic freedom and opportunity. Cascade Policy Institute is Oregon’s free market public policy research organization.

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Posted by at 06:00 | Posted in Measure 37 | 44 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Rupert in Springfield

    Um, so looking at this graph, it looks like if we simply shifted spending to the right one budget cycle (two years) or shifted revenues to the left one cycle, things match up.

    Well, obviously we cant switch revenues to the left but we can switch spending to the right. This would mean zero increase for one cycle.

    In other words what we are talking about is if we went one budget cycle with zero increase in the budget we would be a little more on track?

    It’s absurd that the idea of no increase in a state budget is considered such a hardship.

    • Steve Buckstein

      Rupert, I think if we did as you suggest things would only “match up” for that one budget cycle. The problem is that wished-for spending is growing faster than expected revenue. That’s why we suggest a strict state spending limit to keep growth in spending in line with growth of expected revenue.

      • Rupert in Springfield

        Ok my point is that the slope of forecast for expenditures looks to be about that for revenues, the problem is the two are offset, expenditures being higher. Therefore if the starting point of the two lines could be the same, and the slope is the same you would have coincidence. To accomplish getting the same starting point it looks like you would simply have to move the 2011-13 expenditures number to that of 2009-11 on the horizontal axis (in other words keep the same level. After that, expenditures could rise at the same rate and if the same slop is kept you would have coincidence of expenditures and revenues no?

        In other words shift all expenditures, not just one year, the the previous biennium.

        • Steve Buckstein

          Yes, if you could start with expenditures and revenues the same, then our proposed spending limit should keep them roughly the same over time.

  • valley p

    “Instead, we propose what we call Reality Based Budgeting”

    Good idea. How about fist figuring out what we want from government, then figure out what the cost of that is, then make an adjustment to what we both want and are willing to pay for, and then passing the budget and taxes necessary to the job? That would be reality based. Simply limiting state spending to a number and then limiting the growth of that number is focusing on only 1/2 of reality, the taxing part. Try all of reality instead.

    • Steve Buckstein

      I agree. Rep. Thatcher introduced a bill in the last legislative session to do just that; prioritize what we want from state government. The bill got one hearing and then was shuffled off to committee to die. Perhaps the next legislature will do as you suggest.

      • valley p

        That might make it a very long session. I’ll suggest that we have politics for this purpose. if Republicans think the state government ought to get out of certain functions, and spend less on others, then they ought to run on that platform and be explicit about it. That way, if they attain a majority they can get to work implementing what they were elected to do. Complaining about “spending” in general and creating ruses like spending caps without identifying programs to cut is phony baloney.

        Look…the Democrats are clearly the party that supports a large, active, service providing government. They prioritize within the amount of money they can squeeze out of we geese. Its really up to the self described conservative party to put the cuts on the table isn’t it? There was a time when they did that, but they found (since Reagan showed the way) that it was better politics to be against spending in general because as it turns out most people want good schools, decent health care, a secure retirement, nice parks, public beaches, a clean environment, and a regulated private business structure. All of that costs money to provide. People hate paying for all this, so on occasion elect Republicans to reel things in. Then they want things reeled back out and elect my side. Its a continuous dance marathon, and we take turns leading. The problem is that the conservatives have failed to reel things in when it is their turn to lead. My side is doing our job, and your side has given up and only pretends to cut anything.

        • Mary’s Opinion

          Valley,
          A very calm post for you and I have to agree with much of it. If the conservative side is elected to majority, state or nationally, they must be specific and follow through or be prepared to be unelected the following election cycle.

        • Steve Buckstein

          Our report spells out a number of “cuts” – things we believe state government shouldn’t do. Getting out of liquor sales, contracting out DMV and DEQ services, etc. are specifics. The spending limit concept is a way to, hopefully, keep government from creeping back into doing such things when times are good.

  • eagle eye

    M48 was the old “inflation + population growth” formula, right? But this is a recipe for decreasing the relative size of government — not for keeping spending in line with revenue. In fact, the latter WILL occur because of the requirement to have a balanced budget.

    • Steve Buckstein

      Yes, M48 basically limited state spending to increases in population and inflation. To the extent that Oregonian’s income grows faster than that, it would lead to a relative decrease in the size of government.

      • eagle eye

        And that’s why it lost. There is no sign that Oregonians want significantly smaller government.

  • John in Oregon

    I have to say I am impressed by the quality of the comments. YES including VP. Some additional prospective.

    In a recent article for Esquire Magazine four retired Senators Bob Packwood, John Danforth, Gary Hart, and Bill Bradley produced a balanced federal budget in 3 days. Of course its easy for a magazine article, but Packwood said something that ought to scare the pants off everyone. The most recent data (2008-2009) puts Local, State and Federal total spending at 42% of GDP and is rising sharply.

    Simply put government at all levels is consuming wealth at an increasingly faster rate than the people are creating new wealth. The result is Peter Schiff, the man who called the mortgage crisis years in advance, is predicting that the dollar will lose 50-70 percent of its value in 2011.

    So the discussion turns to what to do about it? There are choices, some not so pleasant. We could do nothing and let circumstances do its devastation. We could limit spending to no faster than GDP, which perpetuates the situation forever. Or we could deal with our drunken spending.

    The question is how to deal with drunken spenders. Just one example, TriMet.

    TriMet is a billion dollars in un-reported debt for retirement benefits, spending billions they don’t have on light rail, and asking for millions in new taxes for buses.

    There are two ways to approach a budget. Well with congress in mind, three actually, as congress didn’t do a budget.

    One way to budget is to pour all the things we want to spend into a big bucket and decide what to cut.

    The other is to list what must be spent then fund that until the money is gone.

    Those two are very different.

    • valley p

      “Simply put government at all levels is consuming wealth at an increasingly faster rate than the people are creating new wealth.”

      Or another way to think about it. Government at all levels currently provides 42% of all the goods and services produced in the United States. When government provides retirement checks & medical insurance to geezers, fights wars, defends shipping lanes, manages national parks and forests, inspects food for safety, props up the incomes of grain farmers in the Midwest, builds and patches highways and bridges, teaches kids, polices streets, puts out fires, and cleans up sewage, it is not “consuming wealth.” It is providing services that the private sector either can’t or won’t provide as well or as cheaply.

      If we want government to provide fewer services so we can spend our money on other stuff, fine. Elect people who will reduce these services.

      Put me down for government stopping the service of propping up the incomes of Midwestern grain farmers and defending fewer nations overseas. Who should I vote for? The Tea Party?

      • Steve Buckstein

        Put me down for government stopping the service of propping up the incomes of Midwestern grain farmers and defending fewer nations overseas. Who should I vote for? The Tea Party?

        v person, I must say that I agree with your national policy choices stated above. Who you vote for of course is up to you, but getting government out of where it doesn’t belong is long overdue.

        And, I agree with John above, the quality of the comments on this post is refreshing.

        • valley p

          It helps when we don’t do name calling.

          The problem is we don’t have a political party or movement structured around reducing only the things you or I or anyone else thinks are the things that should be reduced. There was a time when conservatives were willing to talk in public about reducing transfer payments to geezers. Those days are gone, except for vague proposals to reduce benefits for future geezers, starting 10 or 20 or more years from now maybe. Only by then the future geezers will be voting just as much as the present ones to preserve their benefits, and there will be many more of us, so forget about that fantasy. Ain’t gonna happen.

          There was a time when we liberals were willing to call for reductions in “defense” (offense?) spending. But we were branded as “soft,” lost a lot of elections due to this, and now we attaboy every increase in spending on the military or “homeland” no mater how stupid or wasteful.

          Both parties equally support payments to Midwestern farmers because we have about 20 Midwestern senators who make sure their constituents get paid.

          So the math is, both parties now are 100% behind geezer entitlements, defense, and farm subsidies. That along with interest payments on the mounting debt comes to about 90% of all federal spending. The rest of the spending is the stuff government actually does to make our lives a little easier, like take care of parks, pave roads, inspect food & drugs, keep the private bank system from collapsing, and so forth. There is a space program in there somewhere as well. None of that stuff is going to be done away with. Maybe art grants, but who would notice?

          In other words, we can’t really cut federal spending other than very marginally. That is reality. My side gets this and is willing to raise taxes (at the top end) to help pay for it. Your side is unwilling to raise taxes and unwilling to get behind any meaningful cuts. This is why I say my side is more reality based than yours. We calculate costs against needed revenues. Your side pretends we don’t have to raise taxes ever. Again, I’d like to see self described conservatives step up and tell us what they will cut, not 20 years from now, but today. If those cuts amount to only $100B, which is true for the “Pledge” the R Party has made so much of, then you are saying that trillion dollar deficits are just fine.

          I’m using “you” in the broad sense here. I know you Steve, are not a Republican. But you are allied with them politically.

          • Steve Buckstein

            At least one Republican is proposing serious “cuts” in the federal budget. Rep. Paul Ryan of Wisconsin has what he calls his Roadmap Plan, which CBO agrees will likely lead to surpluses of 5 percent of GDP by 2080, compared to deficits of 42 percent of GDP by that time if we do nothing.

            His plan is set out at http://www.roadmap.republicans.budget.house.gov/Plan/.

            Ryan will speak about his plan at the Oregon Business Association annual dinner this Thursday in Portland. I’ll be there and will be interested to see how the OBA’s “moderate” business membership respond to his ideas.

          • valley p

            Mitch Daniels of Indiana is also at least semi serious. But both of these guys have zero support within their caucus. Daniels has been accused of heresy for suggesting we can’t keep cutting taxes.

            On Ryan’s proposal, you have to realize the CBO does not really score a proposal that far out. They can’t. Way too much uncertainty. Being off by 1/2% on a projection over 50 years would be trillions of dollars of GDP.

            Second, Ryan does 2 things that seem unserious. First, he exempts anyone over 55 from having to take any cuts at all in SSI or Medicare. Essentially this puts all the cost of cutting the budget on the future, not the present. Its wise politics maybe, but ignores what actually happens when those under 55 reach 65. Answer, they vote the cuts out, so the future never really arrives.

            Second, Ryan makes the Bush tax cuts permanent and then has even more tax cuts. Enough said about that elsewhere. But its trillions of lost revenue.

            And third, Ryan makes unrealistic assumptions about holding discretionary spending down, even while he fails to reduce defense spending.

            So in sum, what Ryan proposes is certainly what a lot of Republicans would like to do if they could. But they can’t. And if they did it would not balance the budget anyway.

            But at least he has a proposal. That is more than you can say for the rest of them.

  • John in Oregon

    Although wealth creation is not a budget category as such, it nevertheless has significant impact on spending. When more wealth is created more is available to spend. As such the governments relationship to wealth consumption is worth study. VP provides a list of several different kinds of government activity, which I break into three categories here.

    First I would list constitutionally authorized activities. Defense, policing, building roads, and I would add courts based on rule of law. These things are necessary to create the environment in which civil society will thrive.

    The second group are activities that have been done by government or alternatively by Local Improvement Districts, Associations, and even private enterprise. These include sewage treatment, fire departments, power companies, water districts, and telephone service.

    Lastly are activities that arguably ought not be done by government. Subsidizing farmers, providing retirement, closing off resources, education, rationing medical procedures, inspecting food, and mandating unproductive products.

    Because it creates no goods or voluntarily purchased services, the government creates no wealth. In fact, government is actively discouraging the production of new wealth in America.

    As Larrey Anderson put it, “the myth that governments can successfully produce manufactured items is easily proven false. Take a look around you. Try to find one thing in your house that was manufactured by a government”. My example would be the Chevy Volt. The product of a research project, inadequate range, limited capacity, excessive subsidized cost, and requiring a premium gasoline engine on the highway the Volt is not a real product.

    As to government jobs and services, Anderson provides an example.

    Jane Jones works for “American Widgets” and earns $50,000 a year. John Smith is one of the civilian employees of the federal government. He also is paid $50,000 dollars a year and Jane and John each pay $5,000 in federal income taxes per year.

    Jane must produce more than $50,000 dollars worth of widgets each year. She must make a usable and salable product. She must add something of value to the economy in order to keep her job. The customers who buy Jane’s widgets pay all of Jane’s salary. This includes the $5,000 in tax revenue the government collects. The customers do this voluntarily because they want and/or need widgets.

    John Smith works for the Department of Energy, which produces no energy. Perhaps John toils at the “Products and Services” division writing “Energy Star” ratings. Or perhaps John provides some sort of real public service such as Nuclear energy research.

    Whatever work John does, it does not and cannot pay for itself. John pays $5,000 in taxes. This leaves us with $45,000 of John’s salary that is paid…by whom? Not by John’s customers — he doesn’t have any. John creates no products — so John has nothing to sell. No one voluntarily buys John’s services — whatever those might be.

    The government does not pay John because, as we have seen, the government, including John, doesn’t make or provide anything to sell. Jane pays John’s salary — or rather, in our example, nine “Janes” do.

    Every time a politician claims that the government is going to increase production, create wealth, or provide jobs…Be afraid, be very afraid.

    Here VP brings us to the dilemma as it’s often presented. > *we can’t really cut federal spending other than very marginally. Your side (whoever that is) is unwilling to raise taxes and unwilling to get behind any meaningful cuts.* VP accurately reflects the legacy media framing as a Sophie’s choice between cutting spending or raising taxes. In other words we all must choose the path to a smaller piece of a shrinking pie.

    I submit that is a false choice. Other options abound, not the least of which is encouraging the private sectors creation of new wealth. We each get a piece of a larger pie. We can insure that when government consumes wealth it does so in the least destructive way.

    Much has been said of one side verses the other. Observing the TEA party and 912 movement this is true. The politicos and legacy media fail to properly identify the sides. At one side are the people who are opposed by Establishment Governmentarians both Democrat and Republican on the other.

    • valley p

      We have a few things in common John. We both farm apparently.

      “Other than the occasional exception which proves the rule, government does not produce wealth.”

      It most certainly does. People educated in public schools and universities use that education to be more productive, and at times to invent entirely new ways of doing things that raise the standard of living for everyone. Public education is not just a leveler, it is also an advancer. In modern economies, education is gold. Better than gold actually since gold has little instrinsic value.

      Speaking of gold mining, the government (we the people) own much of the land where energy and mineral resources are located. In most cases we are not the ones to develop these resources, the private sector does that through leases. But in some cases the government has been the “creator of wealth” (to use your phrase), i,e, Timberline lodge, the Bonneville hydro system, dredging of rivers and harbors to enable shipping, etc… It also enables wealth creation by building an interstate highway system among other things. No public highways no trucking, and no trucking not much interstate commerce and a lot less wealth.

      “Second, the government and Federal Reserve has flooded the market with liquidity. Massive stimulus and Quantitative Easing *produced no identifiable change* in business activity. ”

      The stock market has gone up around 3000 points since that quantitative easing (money printing) went into effect. Profits are way up. Unfortunately consumer demand is not up enough to generate more productivity. A loss of 8 million jobs practically overnight has consequences on the demand side. Full recovery will take a while.

      “The simple fact is that uncertainty about government intervention, restrictions, regulations, markets not being allowed to adjust and bleak expectations are a greater drag on expansion.”

      And how does changing political parties a mere 2 years after the last change increase “certainty?” How does a threat to repeal recently enacted banking regulation and health care laws that are only now going into effect increase “certainty?” If CEOs wanted certainty they would not be funding Republican candidates. Your thesis is wanting.

      Sure, people have lost trust in government. It seems incapable of filling the hole the financial industry dug for the nation. But most have also lost trust in financial markets. Should we do away with either as a consequence?

      Private enterprise does not sit around waiting for government to create more certainty. Private enterprise responds to market opportunities. If the market is there someone will supply the demand. My company certainly does not sit around waiting for the next election or policy change to make business decisions. We go where the market is and do what we have to do to sell our services. If we sit and wait then a competitor gets the business. Its pretty simple.

      By the way…what do you think of Intels decision to invest 5 billion in Oregon after passage of Measures 66 and 67, and Oregon’s likely continued democratic/socialist (kidding) rule? Doesn’t that give you even the slightest cause to rethink your core assumptions?

  • Steve Buckstein

    …he exempts anyone over 55 from having to take any cuts at all in SSI or Medicare.

    True, and I know of virtually no “serious” proposals that advocate cuts to those who are on these programs or nearing them. Yet, the airways are full of political ads attacking any candidate who has ever mentioned or supported some form of SS/Medicare reform as virtual robber barons who would take their money and gamble it away on Wall Street. Even if they were advocating personal accounts for older Americans, no one is saying those accounts need to go into the markets. One could invest in US Treasury bonds or FDIC guaranteed bank accounts with virtually no market risk. Maybe after the election we can get back to serious policy discussions instead of the scare tactics we see today.

    • valley p

      “I submit that is a false choice. Other options abound, not the least of which is encouraging the private sectors creation of new wealth. We each get a piece of a larger pie. We can insure that when government consumes wealth it does so in the least destructive way.”

      Its called voodoo economics. How are you going to “encourage” the private sector to produce more goods or services for people who are unable or unwilling to pay for them? Answer is you can’t, nor can anyone else. You can cut business taxes to zero and it would not encourage them to produce any more than there is a market for.

      You started by making a case for serious cuts to government, then you backed off. Because you know you can’t get anyone elected on a platform of doing away with SSI, farm subsidies, food inspections, and all the rest. Grow up and accept that we should pay for what we get.

      Steve, why do we need “personal accounts?” How is that going to save a nickel. And how would you pay the transition costs from the present system to a personal account one?

      We already have personal accounts. They are called IRAs. I have 2 of them, and suspect you have at least one. SSI is social insurance. It backs up personal accounts and company pensions, which have a well documented history of market failures. SSI can be “reformed” by lowering benefits, raising taxes to pay for them (or raising the cap,) and by adjusting the age at which one can collect. It doesn’t need to be “reformed” by turning it into what we already have elsewhere.

      The fact is, you can’t sell the American people on turning SSI into a market-based program because people know the market is a game of craps. You say, we can invest in Treasury bonds or FDIC guarrenteed savings accounts. Do you know how hypocritical that suggestion is? If US savings bonds are a sound investment, then the SSI trust fund is doing great, because that is what it has trillions of dollars invested in. If FDIC guarenteed savings accounts are a good investment at 1% interest, then you need to buy a calculator. And who provides the guarentee? The same government that guarentees SSI.

      There is no way out you guys. The government is here to stay. And for far more than contracts and defense.

      • Steve Buckstein

        “Steve, why do we need “personal accounts?” How is that going to save a nickel. And how would you pay the transition costs from the present system to a personal account one?

        For now, I’ll just tackle this part of your long response. We need personal accounts because your current personal accounts below to you – you have a property right in them. The Supreme Court has already ruled that there is no such property right in your SS benefits – Congress can change them tomorrow and you have no recourse.

        I made the US Treasury/FDIC account comments because of the scare tactics that someone will force people to invest in Wall Street. Even if these accounts currently earn no more than SS rates of return, at least the money is yours. If you die before the assets are gone, you can will them to your heirs. With SS, you can work all your life, die early and reap virtually none of your SS “investment.” This is especially discriminatory against minorities who have shorter lifespans than other Americans.

        I don’t think I ever “backed off” from a proposal to simply end SS. I’ve always advocated a transition with those on or nearing SS getting the benefits they’ve been “promised” with younger workers moving to personal accounts. It may not be politically saleable as you say, but that’s not my main criteria.

        As for the transition costs to personal accounts, much as been written. If you’re a glutton for punishment, you might start here where the case is made that the transition costs, while high, are actually less than the cost of keeping the current system that is destined by demographics to cost even more:

        http://www.cato.org/pubs/ssps/ssp13c.pdf

      • Steve Buckstein

        “Grow up and accept that we should pay for what we get.

        I have to say, there’s no growing up on “our” side needed here. We know that we should pay for what we get. We simply object to paying for what we never wanted in the first place. Or, if we want it, we want a better deal than offered (forced) by the government. Let us choose to get what we want from other sources (even if they’re competing government services) instead of being forced to pay for the one-size-fits-all government “services.”

        Farm subsidies, for example, should be ended. Period. Not politically saleable? Then I’ll defer to phasing them out over, say, a few weeks. I could probably even be convinced to let the phase out go for months or a year or two if that’s what it takes to get the government out of where it shouldn’t be in the first place.

        • valley p

          “Farm subsidies, for example, should be ended. Period.”

          On that we are in full agreement. My point is that your side, the budget cutters, won’t touch farm subsidies for reasons mentioned. In fact, they won’t touch much of anything. Read the pledge.

          On SSI, sure Congress could whack benefits away. They don’t “belong” to us. But Congress does belong to us every 2 years. Those who try and whack away will be out of a job and they know it. That makes SSI a lot more secure than a private account in the stock market, or even in certain types of bonds.

          The problem with your transition cost analysis is that it relies on projections far out into the future. Being off by a scosh changes everything.

          Word to the wise Steve. SSI isn’t going anywhere. It isn’t going to be privatized. There is no public support for that. Libertarians ought to accept that as a settled issue and move on to issues where you can maybe make a positive difference.

          • Steve Buckstein

            As you know, I am not a party to the Republican Party’s “Pledge.” I agree that it’s not specific enough and I’m more into policy than politics, so let’s you and I agree to keep making arguments to end farm subsidies.

            On SS, it may be settled politically (for now) but it’s important and I will continue to talk about it when asked. Note that this post on Oregon’s budget woes did not bring it up, you (or someone else) did and I just responded.

          • John in Oregon

            Steve

            I would suggest looking at all subsidies. I would also include all mandates.

            The ethanol mandate now on track to being increased from 10 to 15% is an example. Ethanol has now been discredited, however the bureaucracy continues on through sheer momentum.

          • Steve Buckstein

            I agree with you, John. They all need to be looked at critically. I focused here on farm subsidies because that’s the specific program valley p mentioned and it’s one we apparently agree should be ended. It’s a small step, but a real step away from government involvement in the economy.

  • John in Oregon

    > *You started by making a case for serious cuts to government.*

    Actually I made a case for Government consuming less wealth which is somewhat different. Obviously cutting government is one component. Just the same I still reject the false choice of only cut or tax. Increasing productivity and creating new wealth is a very real component of any budget. That’s precisely the reason I quoted the statistic of government spending at 42% of GDP. Using the vindictive “voodoo economics” didn’t work in 1980 and won’t work today. When it comes to budget, everything must be on the table. Monetary policy, spending policy, taxing policy, regulatory policy, and economic growth, everything.

    Still the gauntlet is what would I cut. Here is one. I am prepared to cut spending by 25% for Public Employee Compensation (PCE) at the Federal, State, and Local level. This can be accomplished by attrition, employee reduction, compensation reduction, or some combination of those. The simple fact is that since 1970 American workers and entrepreneurs have done so while increasing productivity. It’s not unreasonable to expect Government to do the same.

    The counter argument, that the reduction would be just chump change doesn’t hold water. That savings is some $300 billion per year. In fact had that been done in 2007, the last Republican budget, the result would have been at least a $100 billion surplus. Something not seen in the last 30 years.

    VP has raised a pertinent question. > *How are you going to “encourage” the private sector to produce more goods or services for people who are unable or unwilling to pay for them?*

    One easy answer would be same way Henry Ford did. He found ways to produce a product his workers could afford.

    However as VP suggests the answer does seem to be a mystery in the halls of congress and the Federal Reserve. Huge spending increases, zero interest rates, and huge levels of liquidity produce no results if not negative results.

    The answer is to eliminate roadblocks holding American workers and entrepreneurs off the market. Business wants to grow and invest in future sales. To do that they need:

    1] A tax environment less punishing than the current second highest of OECD countries.
    2] Some form of certainty about future Government actions.
    3] Limit complex restrictive regulation.

    For the latter I would suggest a ceiling on the number of pages (CFR book pages at no less than #10 Font) of regulation with an immediate reduction of pages by 10% over the next 24 months. The reduction in number of pages would continue at 2% per year until the number of pages reaches 50% of present level.

    The goal here is not to reduce the level of regulation. The goal is to reduce complex, confusing, conflicting and self contradictory regulation. If a regulation can’t express its goal in a simple way that is clear, concise, and easily complied with in a way that does not conflict with other regulations then that regulation ought not exist.

    • valley p

      “Actually I made a case for Government consuming less wealth which is somewhat different. ”

      Yes you did. And I countered that government does not consume wealth. It provides services. you may not want those services, but others apparently do, and they make you chip into the pot using democratic means.

      “Increasing productivity and creating new wealth is a very real component of any budget. ”

      Yes to both. But the conservative/republican/tea party fantasy is that we can magically increase enough new wealth through tax cuts to avoid having to make budget cuts. That is the approach and thinking, starting with Reagan and carrying right through Bush junior, that created the huge debt we now have. GDP cannot be turned up and down like a spigot. Temporary deficit spending does boost GDP, but its only temporary. As for productivity, sure, that is what makes us wealthier. But cutting taxes does not improve productivity at all.

      “It’s not unreasonable to expect Government to do the same. ”

      It is unreasonable to expect the productivity to follow automatically from arbitrary cuts. Productivity increases in the private sector because of smart investment driven by competition. In with the new and out with the old. Given that SSI, as just one example, has only 1% administrative costs, how would you increase “productivity” by the 25% you plan to cut? How would you increase the “productivity” of park rangers by having 25% fewer of them?

      If you want to increase government service productivity, then you hire the best and the brightest and you give them the latest and greatest tools for the job. In other words, the opposite of what you are proposing (cutting wages). You also incentivize them by letting them keep some of the savings. A few local government entities have done this with great results. We haven’t tried it at the state of federal level yet, but we should.

      In fact, this should be the conservative/republican program. Set some increased productivity targets for public employees, use your business savvy to design an incentive program, and then implement some experiments where you have Republican governors and legislatures. This would be a lot more effective than whining about salaries and benefits.

      Note to John and Steve, I agree with you on ethanol as well as on farm subsidies. I’ll throw in a few hundred billion on “defense” spending. If we could do all that we maybe save a few hundred billion a year. We are still a trillion or so short of a balanced budget.

  • Steve Buckstein

    “We are still a trillion or so short of a balanced budget.

    After listening to Rep. Paul Ryan last night in Portland, I simply reiterate that readers should go to his Roadmap Plan to see what a serious politician proposes to balance the budget while preserving what he sees as important social safety net programs. If his party takes control of Congress I’m sure that his ideas will gain a lot more traction. Maybe not enough to convince valley p and others that they are politically doable, but enough to be part of a serious national discussion.

    • valley p

      But that is the problem Steve. Ryan’s road map doesn’t work. He relies on 2 overly rosy assumptions. First that he could reduce Medicare costs by privatizing it through vouchers. Sure, if you hand old people an insufficient check for insurance they will have to pay out of pocket for the rest, and this is a cost reduction to the government. But there is no way this will ever be implemented. Old voters are too organized and there are going to be way more of them in the years ahead, not fewer. Plus, private insurance companies take 15-30% of the bill for profit and overhead and can’t bargain down rates with suppliers. Medicare takes 2% and can bargain down rates to the extent Congress lets them. What Ryan’s approach would do is raise the cost of health care to the consumer and lower the quality. Not a recipe for success, political or economic.

      Second, he assumes a higher rate of GDP growth than is otherwise projected due to additional tax cuts. Again, no evidence for this. Its voodoo economics all over again. We tried it twice, with Reagan and Bush 2. Didn’t work twice. Why would it work now?

      You want a serious approach to balancing the budget, you do what the Tories and Social Democrats are doing right now in great Britain. You stop the tax cutting and you start the program cutting, with everything, including our sacred military, on the table. That is old fashioned, actual conservatism. American conservatives don’t have the guts for this.

      Ryan’s proposal is smoke and mirrors. Sure, make it part of a “national discussion.” I’m all for that because it exposes the foolishness of modern American conservatism for what it is.

      • Steve Buckstein

        While I agree with you that defense spending should be reduced also, Ryan tackles the portions of the budget that have a much larger impact on the debt. Yes, Britain and other countries are now doing what you call old fashioned, actual conservatives should be doing, but they’re doing to because they’ve hit the wall fiscally. We haven’t yet, and Ryan is trying to keep us from getting to that point.

        Ryan’s plan is much less smoke and mirrors than the current congressional leadership’s claims that everything is fine if we simply raise taxes on the rich.

        • valley p

          “but they’re doing to because they’ve hit the wall fiscally. We haven’t yet, and Ryan is trying to keep us from getting to that point.”

          Have to disagree with you here Steve. First, Britain’s debt to GDP ratio is about the same as ours. They have no more or less hit a wall than we have. The difference may be that their wall is harder than ours because their currency is more vulnerable to runs, so they can’t run the risk of continued deficits, while we can.

          Second, Ryan’s plan is not designed to keep us from hitting an unresolvable deficit wall. It is designed, in my opinion, to use the deficit as an excuse to wean Americans away from entitlements because Ryan is ideologically opposed to entitlements, like you yourself are. Its not about economics. Its about politics. Free market fundamentalists can’t have successful government entitlement programs providing core economic security for people because it negates their core belief that this is either impossible or just plan morally wrong.

          I also don’t agree with you that the current congressional leadership is saying things are just fine. I hear them and Obama acknowledging the longer term problem with SSI and Medicare. In fact, the health care bill they just passed went a long way towards improving Medicare’s prospects according to the same CBO you cite in support of Ryan. And SSI can be kept solvent as is with fairly modest adjustments in the retirement age plus raising the cap on contributions.

          And Obama and the Democrats in Congress agreed to his bi-partisan deficit commission while conservatives sat on the sidelines because they know tax increases will be part of any bi-partisan solution. My take is that Democrats are much more committed to keeping government debt at manageable levels than Republicans are because Democrats value what government does. The objective evidence is in their willingness to raise taxes to pay for programs, including Obamacare, even at political cost.

          Its true Republicans are reflexively hostile to government, especially social spending, but this does not mean they are better at balancing budgets. History shows clearly that they are not. Don’t be fooled by rhetoric. If Ryan wants a balanced budget he can have one. But he can’t have it the way he is proposing it. he has to be willing to give up on continued tax cuts.

          • Steve Buckstein

            We’ve probably beat this discussion to death here. I’ll just note that while you say “…Obama and the Democrats in Congress agreed to his bi-partisan deficit commission while conservatives sat on the sidelines…”, Rep. Ryan is a member of the commission. He might not end up agreeing with the majority when they issue their report, but he is in the game.

  • John in Oregon

    We have the bases for a useful discussion. VP countered that > *government does not consume wealth. It provides services. you may not want those services … * Consider wealth.

    When I go to the market and purchase flour and vegetables I am purchasing products which include goods and/or services. Flour for example is a product that is a combination of goods (wheat) and service (grinding into flour). In this activity, purchasing food products, I am consuming wealth.

    On my farm I grow wheat and corn. At harvest I have generated wealth.

    So far we have a closed system. I am working to generate wealth by growing corn and consuming wealth by eating. We have a fixed amount of wealth in such a simple closed system.

    Now lets postulate that, unknown to me, on my farm 200 feet down there is a vein of gold 24 inches thick, 6 feet wide, and 1000 feet long. Am I wealthy? Did I suddenly create new wealth? No.

    Now assume I wish to drill a well. The hydrologist uses ground penetrating radar to locate the well. He tells me, Dude you have gold on your farm. Am I wealthy? Did I suddenly create new wealth? No, I have only discovered a resource.

    I now hire workers at premium wages to mine the gold, which I can sell. Lets say I pay workers $1,000 an ounce to mine gold which I sell at $1,300 an ounce. Now I have created new wealth which is the profit I make of $300 an ounce. Hopefully I will also become wealthy.

    Creation of wealth is providing products which have more value than it took to create the product.

    Now consider three constitutionally authorized government powers. Military defense, bankruptcy courts, and building roads. In exercising these powers government consumes wealth. None of these create a product, produce a profit, or generate wealth.

    We want those things because they have value. They create an environment in which civil society can thrive. Military forces provide protection against foreign invasion and assault upon international commerce. Bankruptcy courts provide equal treatment under law to settle disputes between people. Roads allow freedom of commerce and movement. These things are not products and no customers purchase them. Nevertheless we are willing to have government consume wealth to those ends.

    Other than the occasional exception which proves the rule, government does not produce wealth.

    With those definitions lets consider another point. > *The conservative/republican/tea party fantasy is that we can magically increase enough new wealth through tax cuts to avoid having to make budget cuts.*

    Setting aside how tax rates impact economic activity under normal circumstances, these are not normal circumstances.

    I suspect VP will be surprised that I agree that tax rates are not the magic bullet they were as recently as 6 years ago. under current circumstances reducing tax rates no longer has the power to encourage private sector expansion it once did. I say this for several reasons, none of which relate to any logical discussion of where business tax rates ought to be.

    First, tax rate impact is no longer linear. That is increasing tax rates will depress economic activity much more than decreasing tax rates will expand activity.

    Second, the government and Federal Reserve has flooded the market with liquidity. Massive stimulus and Quantitative Easing produced no identifiable change in business activity.

    Third, lack of capital is not a drag on expansion. Capital is being held off the market by businesses due to the current hostile business environment. More capital in the form of loans or reduced future tax liability will not promote expansion.

    The simple fact is that uncertainty about government intervention, restrictions, regulations, markets not being allowed to adjust and bleak expectations are a greater drag on expansion.

    Two articles offer a prospective view of moving toward growth.

    An affirmation came from TIME of all places. In an article “Will the Federal Reserve Cause a Civil War?” Stephen Gandel pointed out the intense disagreement about future FED actions. He stated:

    “Usually, there is generally a consensus about what the Federal Reserve should do. When the economy is weak, the Fed cuts short-term interest rates to spur borrowing and economic activity. When the economy is strong and inflation is rising, it does the opposite. But *nearly two years after the Fed cut short-term interest rates to basically zero, more and more economists are questioning whether the US central bank is making the right moves.* The economy is still very weak and unemployment seems stubbornly stuck near 10%.” Emphasis in the original

    An alternative prospective is offered by Charles Hugh Smith via the Business Insider. The Loss Of Trust And The Great Unraveling To Come

    *”The people have lost their trust in their government for good reason: it has betrayed their trust.* The emotions being raised are beyond the understanding of the cowards and brown-nosers pulling the levers of governance: why are people so angry about some botched paperwork?

    The emotions will be familiar to anyone who has been cheated on by a spouse or business partner: *the Federal government has betrayed its people in the most profound way.”* Emphasis in the original

    I think what I am saying here is that none of the familiar solutions are working. The FED reducing interest rates, lowering taxes and all the rest are not making any change.

    Primarily because private enterprise needs to see a path to growth and some predictability which allows that growth. That means government stability, reasonable budgets, reasonable and workable regulation, and an end to constant roadblocks.

    • valley p

      We have a few things in common John. We both farm apparently.

      “Other than the occasional exception which proves the rule, government does not produce wealth.”

      It most certainly does. People educated in public schools and universities use that education to be more productive, and at times to invent entirely new ways of doing things that raise the standard of living for everyone. Public education is not just a leveler, it is also an advancer. In modern economies, education is gold. Better than gold actually since gold has little instrinsic value.

      Speaking of gold mining, the government (we the people) own much of the land where energy and mineral resources are located. In most cases we are not the ones to develop these resources, the private sector does that through leases. But in some cases the government has been the “creator of wealth” (to use your phrase), i,e, Timberline lodge, the Bonneville hydro system, dredging of rivers and harbors to enable shipping, etc… It also enables wealth creation by building an interstate highway system among other things. No public highways no trucking, and no trucking not much interstate commerce and a lot less wealth.

      “Second, the government and Federal Reserve has flooded the market with liquidity. Massive stimulus and Quantitative Easing produced no identifiable change in business activity. ”

      The stock market has gone up around 3000 points since that quantitative easing (money printing) went into effect. Profits are way up. Unfortunately consumer demand is not up enough to generate more productivity. A loss of 8 million jobs practically overnight has consequences on the demand side. Full recovery will take a while.

      “The simple fact is that uncertainty about government intervention, restrictions, regulations, markets not being allowed to adjust and bleak expectations are a greater drag on expansion.”

      And how does changing political parties a mere 2 years after the last change increase “certainty?” How does a threat to repeal recently enacted banking regulation and health care laws that are only now going into effect increase “certainty?” If CEOs wanted certainty they would not be funding Republican candidates. Your thesis is wanting.

      Sure, people have lost trust in government. It seems incapable of filling the hole the financial industry dug for the nation. But most have also lost trust in financial markets. Should we do away with either as a consequence?

      Private enterprise does not sit around waiting for government to create more certainty. Private enterprise responds to market opportunities. If the market is there someone will supply the demand. My company certainly does not sit around waiting for the next election or policy change to make business decisions. We go where the market is and do what we have to do to sell our services. If we sit and wait then a competitor gets the business. Its pretty simple.

      By the way…what do you think of Intels decision to invest 5 billion in Oregon after passage of Measures 66 and 67, and Oregon’s likely continued democratic/socialist (kidding) rule? Doesn’t that give you even the slightest cause to rethink your core assumptions?
      #5.1 valley p on 2010-10-23 14:28 (Reply)

    • John in Oregon

      > *what do you think of Intels decision to invest 5 billion in Oregon after passage of Measures 66 and 67 … Doesn’t that give you even the slightest cause to rethink your core assumptions?*

      Yes lets rethink that. The land use planning was approved in the 1970s. Intel was granted exemption from tax on fabrication tooling in the 1990s. The product is sold out of state. So let’s do the tabulation.

      Land use planing cost. Zero.
      Land use planning delay. Zero
      Fabrication equipment tax. Zero.
      Instate Income tax. Zero.
      Measure 67 tax. Zero.

      Check, check, check, and check.

      • valley p

        I suspect your math is a bit off. I can assure you that their planning costs were not zero. Yes, high tech companies are taxed differently on production capital, and for good reasons. The larger picture is that there is a big difference between the few traded sector businesses that bring in money from elsewhere and can locate anywhere and the 90% of businesses that are either not traded sector or are but have to be in Oregon because this is where the resource they process is located (i.e. timber, salmon, filberts).

        You make arguments for zero or near zero business taxes across the board. I make arguments for targeted tax breaks for traded sector companies that are not location dependent.

      • John in Oregon

        Intel paid the land use planing costs back in the 1970. They don’t have to pay it again today.

        More importantly this eliminates the 3 to 9 year planning delay for the project.

        Of course the tax on production equipment is forgiven. For Intel but not the car wash or dry cleaner next door.

        They don’t sell the product in Oregon so don’t pay income tax or M67 tax. Well they will pay $50.

        • valley p

          “Intel paid the land use planing costs back in the 1970. They don’t have to pay it again today.”

          Are you sure about that John? Land use permits issued in 1970 would likely have been time limited. Much probably changed, including the establishment of Systems Development charges, which were pretty much non existent in 1970. Permit fees have gone up. Utility hookup fees have gone up. Lots of costs and fees have gone up. I would bet Intel was subject to land use costs.

          I don’t know about your 3-9 year delay. If Intel had picked a site outside the urban growth boundary or far from utilities, they would have had delays. The fact they picked a site already zoned for the purpose and with utilities nearby allows them to develop sooner. That seems to be a smart decision on their part.

          The local car wash and dry cleaner do business only in Oregon. Intel is traded sector. That was my point. Taxing traded sector businesses at a lower rate makes perfect sense from an economic development standpoint. Is it fair? Nope. But being traded sector gives a company negotiating leverage with government. Being a dry cleaners? No leverage. Pay the tax or do business in another state and someone else will do the dry cleaning here. Large corporations have political advantages. We can end that, but would put Oregon at a big disadvantage. Is that what you are advocating?

  • Bono

    Can we not have some consensus on the budget?

    If we can get the easy stuff done first, then the next step will be that much easier to do.

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