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Posted by: 21. February 2013

One Small Step Towards a Balanced Budget, One Giant Step Towards Insanity

Put this in the "once in a blue moon" category. According to data recently released by the Treasury Department, the U.S. federal budget ran a surplus in the month of January. That's right a surplus. As of January 1, most of us experienced a decrease in our take-home pay due to the ending of the payroll tax holiday. As a result, revenues flowing into the federal treasury jumped up by 16% when compared with the same month a year ago, while federal spending increased by only 3%. So they took in $2.9 billion more than they spent.

The good news is that if the economic recovery continues to accelerate, then revenues will continue to increase and the deficit will shrink further. And that is the crucial point in all of this. The Republicans and Democrats continue to bicker about who should pay more taxes and whose benefits and loopholes should be eliminated, but by far the best way to balance the budget would be to grow the economy.

The Democrats are fond of reminding us all that the last time the federal budget enjoyed an annual surplus was during the Clinton administration. They are correct to point out that the tax rates on upper income earners were higher at that time then they are now. The unemployment rate was low, and the economy was growing at a brisk pace. And the federal government routinely took in more money each month then they spent.

So the big question is: How do we get back to that? How can we get economic growth back to a high enough level that we can pay our bills? This will not happen overnight, but the first thing we can do is avoid the sequester. It is true that the sequester will substantially diminish the amount of federal spending each month, but it will also curtail economic growth. People will lose jobs and confidence levels will fall. This is not the way to run a country.

It is still a little too early for me to predict what will happen after March 1. A rough estimate would be that economic growth for the rest of 2013 will be cut in half. It is possible that I may be a bit pessimistic, and I remain hopeful that somehow the sequester will be avoided. But I cannot think of any scenario where the sequester turns out to be a good thing. It is going to create a mess.

 

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