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.
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| 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.
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| 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.
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| 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.