The Government Shutdown Didn’t Have To Happen

Partisan GridlockIt is pretty easy to find news about the negative effects for the economy caused by the Federal Government Shutdown. One common thread I’ve noticed is the lack of clarity on the actual cause of these losses, and the overarching mentality expressed by those reporting on the events. The Government Shutdown caused the private sector to lose $24B in revenue. How could that possibly be? Why is it that the Private Sector is so dependent on the Government that the Government’s inability to function as a result of partisan gridlock should damage the economy on the order of one tenth of one percent of US GDP?

Over the course of the last several decades the Federal Government has created a quid-pro-quo climate with its private sector contractors, those contractors’ other stakeholders, the tourism industry, and those who depend upon Government subsistence support. Specifically, when the Government stops spending money there are very focused impacts related to the stemming of that flow of funds from the taxpayer to the private sector or Government dependents. When the Government is unable to settle its fiscal affairs those who have, as a function of their business model, hitched their revenue streams to the chuck wagon that is Federal spending suffer. The same goes for those who are Federal dependents.

How does this happen? Why should it be that there is such a vast transfer of taxpayer wealth to those private interests that either provide a service to the Government in some form, or those who depend on the Government for subsistence? More to the point, why should it be that the Government has allowed for such an entwining of  interests solely dependent on Federal spending? It is almost as if entire industries in the Private Sector have become so dependent on Federal Spending that the nearly five years of Continuing Resolution debates in Congress (as opposed to an actual Federal Budget) cause such a disruption in Federal activity that it becomes a National Crisis. This is a structural problem that must be resolved if the private sector is going to be able to extend a business plan for growth beyond the end of the current CR.

So What is the Problem?

Current GDP

Our GDP is reported at $15.68T as of 2012. As I stated earlier, the reported $24B in economic loss attributed to the Shutdown accounts for 0.0015% of the annual Gross Domestic Product for the entire country. Again, my question is why is there such an impact on the economy when the Federal Government stops spending money. The mechanics of Federal spending necessitate that the funds expended are at the expense of the economy, either through individual or corporate tax liabilities decreasing discretionary spending, through borrowing, which has a prolonged effect on the Nation’s spending obligations as a result of the requirement to service that debt, or through printing of new money, which devalues the money currently in circulation. Every activity the Federal Government expends funds on decreases GDP by a proportionate amount because, at some point, those funds must either currently exist in the economy, or be created out of thin air. Either instance is a drag on economic activity at the macro scale, which effectively dampens GDP growth.

The Nation has been structured in such a way, both politically and economically, to rely on predictable Federal spending patterns, so much so that business models begin to show signs of operational failure when Federal spending is decreased. Politicians are not recognized for their beneficial contributions to Federal fiscal responsibility as much as they are recognized for the amount of Federal spending they are able to bring back to their Districts. Put simply, politicians are empowered to spend taxpayer funds in order to secure their positions of power. This creates a system where Government promised favors are developed in order to entice businesses and special interests to support this politician or that. Those favors are often in the form of contracts, directed business opportunities, tax considerations, and other vehicles of crony capitalism, all of which fail any ethical test imaginable. This, coupled with the lost revenue from above the board contractors simply providing services to the Government in its legally mandated activities and lost revenue from the industries that support these activities (support services, ancillary services, tourism, hospitality, etc.) add up to a significant loss over the course of a 17 day shutdown.

The way the Government spends only makes things worse!

Baseline Budget ModelThe Federal spending model is broken. The fact that there hasn’t been a Federal Budget since April 29th, 2009 only highlights this. That budget was for on-budget operational efforts, and did not include appropriations for the Iraq and Afghanistan wars, which were handled with separate bills. Traditionally, the Federal Budget assumes that “effective” programs require funding increases in order to continue being “effective”, and as such, those programs often receive those funding increases automatically as a matter of the baseline budgeting model.

Baseline Budgeting creates a basement below which the Government will not lower spending levels. Over time this created an expectation by program managers that every concurrent year of operations will come with an almost guaranteed increase in funding. For the longest time this had been the case, with some very specific exceptions. The problem with Baseline Budgeting is that it doesn’t allow for conversations about spending reductions to begin from a position of strength on the part of those proposing fiscal responsibility. The premise begins with the idea that, in order to continue being “effective”, annual increases in the baseline are required.

Baseline Budgeting coupled with partisan gridlock causes a Federal budgeting nightmare when budget deadlines aren’t met. The ultimate culmination of this gridlock is a shuttering of services when the deadlines are missed.

How can we fix this?

US ConstitutionCurrently, the Constitution coupled with various other pieces of legislation requires Congress to pass a budget every year. They’ve bypassed this by passing Continuing Resolutions instead of actually passing a Budget, thereby continuing the baseline budget totals established by spending levels following the 29APR09 budget. Not only that, but because the CRs that have been passed often are not for an entire year’s worth of operations, the threat of shutdown is almost always looming off on the horizon or actively being debated in Congress.

There is a way to fix this, though. Congress is not the answer. There will always be a very small minority who will be willing to do what is right regarding Federal fiscal responsibility, but the core of this problem is politicians find very early in their careers that if they simply promote the status quo they will almost certainly grow their power.

No, Congress is not the answer. There is, however, a way for the States, often the hardest hurt in terms of the deleterious effects of Federal dysfunction, to Amend the Constitution without the consent of Congress. This process, as well as a set of proposed Constitutional Amendments, are detailed in Mark Levin‘s most recent book, “The Liberty Amendments: Restoring the American Republic”. The States, through effective and concerted use of Article V of the Constitution, have the means of proposing and ratifying Amendments that can then be used to force Congress to not only abide by the Constitution, but also eliminate the overarching powers they’ve delegated to the Executive Branch, thereby creating an Administrative Branch of Government by fiat. In terms of this article, the Amendment proposed by Mark that would directly address Spending and Taxing powers, and are covered in Chapter 5.

Specifically, the Spending Amendment would enforce a budget timeline, and, in the absence of a budget being passed by Congress and signed by the President, would automatically fund the Government at the prior year’s budgeted levels minus an across the board 5% reduction in spending. This would eliminate the threat of shutdown because the Government would continually fund itself as a function of the Constitution. This Amendment also requires that spending levels not exceed revenues, except in extreme circumstances, thereby eliminating a need to continually increase the debt ceiling because the debt should never actually increase. This would dramatically reduce Federal borrowing and allow for the Government to actually make payments on its debt principle, instead of only servicing its debt interest.

We Can Only Fail if We Surrender

National EnsignThe Government continually acts outside of its Constitutional Boundaries. No greater negative impact on every individual in the United States can be effected than that which couples future tax revenues to debt servicing without end. There are ways of resolving this issue, and decisively so, but they do not manifest themselves without hard work and the willingness to accept risk. Currently, we’ve all come to understand that our Congressional Leaders are unwilling to apply themselves to either the hard work or to the consideration of that risk. I believe it is time the States and the People take it upon themselves to solve the problems Congress has created, and the time to act is well passed.

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