Friday, August 5, 2011


Are we finally ready to admit that we're in a period of prolonged recession? If so, we will need to adjust our spending accordingly. Families and businesses have already been doing that, starting during the financial crisis of 2008. Businesses in particular have not had the luxury of waiting. 

The federal government, on the other hand, increased spending dramatically in 2008 (with TARP) and 2009 (with the stimulus). This isn't inherently wrong. According to Keynesian economics, the government should spend more in a recession to balance the drop in demand from the private sector.

But a government can't do so year after year without racking up huge debts. At some point, government must recalibrate its spending down to a level that is sustainable in the economy as it stands. I think we are at the point that our budgets have to start reflecting our lower revenue and lower growth prospects. Perhaps we should've started last year, but we didn't: the 2010 budget was almost as high as the 2009 budget.

So, as a nation, what are we going to start sacrificing? With surprising consensus, Congress thinks defense spending is something we don't need so much. We're now considering $950 billion in defense cuts over the next 10 years, roughly 13% of the projected defense budget. Of course, that's just the beginning of the cuts we'll need. I'd like to make a couple suggestions.

First, cut unemployment benefits, which we've been extending, now up to 99 weeks. Normally benefits last 26 weeks, but these are hardly normal times. In most recessions, benefits are extended, sometimes to 39 weeks, sometimes to 52 weeks. I don't think the period of 99 weeks has a precedent, but then this downturn is the worst since the Depression. However, at some point the unemployed person has to finish making the adjustment, retrain, get along on just one salary, or move back in with Mom or Uncle Ted. I think 52-60 weeks should be the cutoff point. Potential savings: I don't know, and I'm not going to research everything.

Another obvious area to trim (to me, at least) is Medicare and Medicaid. Let's be honest here... we all know the healthcare spending in this country has to change, so that means changing Medicare and Medicaid (and the federal employees system, and your health insurance, and everyone's).

Our healthcare system is another beast we've fed way too much, though I don't hear Grover Norquist using those terms. However, that description applies more to the healthcare spending than to any other sector in our economy. Let's knock down the barricades (festooned with signs saying "Hands Off My Medicare") and put this beast on a diet. Potential savings: $12 trillion+ in 10 years depending on how deep we cut. Do we dare?

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