Achieving Stability During a Budget Deficit: Four Pillars of Fiscal Solvency

     The diagram below shows that there are four things Congress can do to attempt to solve a budget deficit. These are four tools that Congress can use to fill the gap between how much tax revenue the government is taking in during a given year, and the full cost of the annual budget.

     These four tools are: 1) Increase taxes; 2) Increase borrowing; 3) Reduce spending; and 4) Inflate (or "print money").

Note: The federal government can use all four tools,

but the state governments can only increase taxes,

increase borrowing, and reduce spending.

State governments do not have the power to inflate the currency.

     I have depicted the "reduce spending" pillar broken, because the overall federal government budget continues to increase every year, meaning that this tool isn't being used (except on the micro level). 

      This can only mean overreliance on increasing taxes and borrowing, and on printing money.

     Through understanding the graphic above, we can see how to overcome that overreliance. Making proper use of the "reduce spending" tool, will allow Congress to increase taxes and borrowing less than it was planning to increase them. It will also allow Congress to get by without resorting to inflating the currency (and thus devaluing the dollar) as much as it was planning to inflate.

     The federal government's budget deficit from the year 2020 was a whopping $3.1 trillion; that is, the federal government took in $3.1 trillion less in tax revenue, than it spent on its programs and projects.

     Let's round that $3.1 trillion off to $3.2 trillion (the nearest multiple of $800 billion) to make things simpler. Let's also assume, for the sake of simplicity, that we want Congress to rely on each one of its four tools, in equal dollar amounts.

     This would mean setting a baseline of 25% reliance each - or just under $800 billion each, considering the current deficit - in order to balance the budget, and make revenues and spending meet.

     Thus, by simply dividing the current (or future) deficit by four, we know what Congress should do:

     1. Increase tax revenues in a manner which will result in the raising of an additional $800 billion this year.
     2. Borrow $800 billion more this year than the federal government did last year.
     3. Reduce spending by $800 billion as compared to last year.
     4. Inflate by $800 billion (i.e., announce a new "Quantitative Easing" program, and authorize the Federal Reserve Bank to purchase $800 billion worth of U.S. Treasury bonds).

     This may not be a popular set of proposals, but based on the severe deficit and debt problems, and the statistics and the number of tools available, we can at least conclude that these proposals constitute a logical, sensible, pragmatic, "moderate" position on the matter.
     In my opinion, politics would probably be a lot simpler if this set of proposals were viewed as the baseline or "centrist" position, and if the political parties were split along the lines of the degree to which a politician or party advocated overreliance or under-reliance on any particular one of the tools.
     The importance of inflation and borrowing is under-emphasized in the media. Political propaganda tells us that Democrats want to spend more money, while Republicans want to spend less. The truth is that neither major party is seriously considering the severe budget measures which it will require to get us out of the huge hole in which we find ourselves (nearly $28 trillion in debt).

     It should be noted that the four-step formula which I have articulated above, is only good for filling the gap between spending and revenue, and getting rid of the deficit.
     Actually paying off the debt will require achieving a budget surplus for many years in a row, and using that money to reimburse the nations and bondholders who loaned the government those funds.
     Fortunately, though, the same tools can be used to achieve a surplus, which can be used to fill-in the deficit. I have recommended paying-off $1 trillion dollars a year, as soon as a $1 trillion annual surplus can be achieved.

     To fill a $3.2 trillion hole in the federal government's budget, and generate a $1 trillion annual surplus, simply add one-fourth of one trillion dollars ($250 billion) to the target amount assigned to each one of the four tools.

     1. Increase tax revenues in a manner which will result in the raising of an additional $1.05 trillion this year.
     2. Borrow $1.05 trillion more this year than the federal government did last year.
     3. Reduce spending by $1.05 trillion as compared to last year.
     4. Inflate by $1.05 trillion (i.e., announce a new "Quantitative Easing" program, and authorize the Federal Reserve Bank to purchase $1.05 trillion worth of U.S. Treasury bonds).

     It is my hope that this diagram and article will inspire a new wave of debate regarding how the government should best attempt to balance the budget, and restore fiscal solvency to our tax base and to our currency.

    

Written and published on February 9th, 2021

Inspired by content included in a congressional affairs class taught by

University of Wisconsin at Madison professor David T. Canon

between 2005 and 2009