Wednesday, April 16, 2014

A Plague on Both Your Houses, I: Republicans

A few weeks ago both the Wall Street Journal and the Washington Post went into great depth on Representative Paul Ryan’s 98-page budget proposal that Ryan believes would balance the budget in a decade.  The Wall Street Journal seemed to like it.  The Washington Post wasn’t quite as enthusiastic.

Stop inflation, stop spending.
This is an over-generalization, but Republicans such as Ryan believe that the main problem is spending.  There’s too much of it.  The Democrats such as . . . well, take your pick, but (another over-generalization) also agree that the problem is spending.  There’s not enough of it.

From the perspective of the Just Third Way, they’re both right — and both wrong.  Both Republicans and Democrats could use a little basic accounting theory.

Republicans, you’re right.  The government (and everybody else) needs to stop spending so much.

How do you know you’ve spent too much?  You’re in debt.

That, however, only applies to spending for consumption.  Going into debt is fine, in fact, it’s strongly recommended . . . if you go into debt to purchase something that pays for itself.  We don’t mean in cost savings.  We mean with a stream of income generated out of the capital’s own future production of marketable goods and services.

The idea that cost savings — decreased spending — is a substitute for increased revenue is an illusion.  It’s a powerful illusion, to be sure, but still an illusion.

The fact is that cost savings do not generate revenue.  They increase net income, which is not the same thing.

Further, cost savings only translates into increased income when you have a revenue stream to begin with.  That’s because “income” is equal to “revenue” minus “expenses” (“costs”).

Any first grader should be able to tell you that $10 minus $6 equals $4.  He or she should also know that $10 minus $3 equals $7.

Thus, if you subtract $3 from $10 instead of $6 from $10, you will have $7 instead of $4.  The $10 stays the same, but you have more money in the end by cutting a cost.

Of course, if you don’t have the $10 to begin with, it’s not going to make too much difference whether you take away $6 or $3.  You’re still going to be in the hole.

Rent or buy?
Consider it another way.  Suppose you make $500.00 per week.  You rent a car for, say, $150.00 per week.  You find out you can purchase a car for $100.00 per week.  All things being equal, by purchasing a car instead of renting it you save $50.00 per week.  Has your personal revenue stream increased by $50.00?

No.  Your revenue is still $500.00 per week.  By spending $100.00 on a car instead of $150.00, you are using that revenue more efficiently, but you have not increased your revenue by one cent.

And, again, if you didn’t have the $500.00 per week to begin with, you wouldn’t be able to afford to rent or buy in the first place.  Did you increase your revenue stream by $150.00 per week by not renting something you couldn’t afford anyway?  Do we have to answer that?

If you want to increase your revenue instead of (or in addition to) using it more efficiently, you must produce more marketable goods and services at a lower cost (do more with less, what R. Buckminster Fuller called “ephemeralization”), or persuade someone to pay you more for the same or lesser amount of marketable goods and services (do less with more).  We’ll leave it to you to decide which is the more ethical alternative.

An accounting perspective.
Thus, from an accounting standpoint, simply cost-cutting isn’t even part of the answer.  No business or government should ever spend a cent it doesn’t have to and can justify to its shareholders or taxpayers anyway.

That’s not “or justify.”  Businessmen and politicians can always justify whatever they want to do.  The real issue is whether the expenditure is truly necessary, i.e., whether the business or government is being efficient.

Inefficiency (which includes unnecessary spending, corruption, redistribution, and engaging in non-essential activities) is very expensive.  Cost-cutting should be part of “business-as-usual” in all organizations, private sector, public sector, business, non-profit, or government.

So, despite Representative Ryan’s evident goodwill (we’re assuming that he has goodwill and that it’s evident), and however necessary cost-cutting is at all times, not just when people are in a panic, it’s not enough.  Revenue must also be increased, and for a government, that means providing the proper environment for people to become productive to be able to generate the revenue to rebuild the tax base.



Anonymous said...

The larger the government spending the larger the burden on the society.

The objective should never be about increasing government revenue. The more government you have the less freedom in ALL aspects of society.

Government has infinite revenue needs. This is different from any other organization.

Michael D. Greaney said...

Anonymous, I think you missed the point, which was what to do about the growing debt. A glance at the Just Third Way's "four pillars of an economically just society" reveals that one of them is "a limited role for the State." That is a given.

Simply reducing the role of government, however, does nothing to repay the debt. Neither will mere cost cutting do it, and certainly not increasing it. The only way to pay down debt is to increase revenue, and that means rebuilding the tax base, at the same time that you reduce government expenditures.