The current California budget crisis, while troubling in its own right, is merely a dress rehearsal for what the entire country will be facing in the next decade. California is showing us that even governments with economies larger than Spain, Mexico or Canada and with such world class assets as Silicon Valley and Hollywood are not immune to dire financial straits. Unlike the global credit crisis, California's problems do not originate from complex Mortgage Backed Securities, Credit Default Swaps or other complex derivatives. Like so many of its residents, California is simply trying to spend more money than it earns.
As has been pointed out innumerable times in personal finance advice columns, there are two simple ways to resolve this issue, increase income (raise taxes) or reduce spending (cut services). Unfortunately, neither of these is deemed politically "palatable", which is the real crux of the issue. The current political environment in both Sacramento and Washington makes it virtual political suicide to vote for any meaningful increase in income or reduction in spending as the offender would be crucified in the next election cycle as the "candidate who voted against saving infants' lives" or "who voted for tax increases that caused working class people to lose their homes". The flip side of this scenario is that the intelligent legislators will simply do nothing. If there's never a budget presented with cuts for children's health care then you can't be accused of increasing spending or cutting health care. If there's never a proposal for tax increases, you can't be accused of raising taxes or not balancing the budget. The best move politically is to do nothing and blame your lack of inaction on the opposing political party; it's an undefeatable strategy that has been adopted by the majority of the legislators.
To break this logjam of complacency, we need a new way of allocating government money. The current structure of passing large bills that represent an entire budget with each line item having a percentage increase or decrease over the previous year is irreconcilably broken for the reasons enumerated above. Instead, we need to move to an affirmative style of budgeting where each representative is able to actually represent their constituents and allocate their tax dollars to the programs that are important to them.
Here is how it works: at the beginning of each budget cycle, 50% of the estimated revenue (minus required interest payments) would be allocated to the House of Representatives and 50% to the Senate. The total dollar amounts allocated to each chamber would then be equally divided among the members. For example, if the total estimated revenue was $3 Trillion, then the Senate would receive $1.5 Trillion and each Senator would receive $15 billion to allocate. Each member is then free to allocate their percentage of the revenue on whatever programs they (and their constituents) see fit. Since all programs would have an initial budget of $0, if no legislators allocate any money to ethanol subsidies, then they would cease to exist. If less money than is currently being spent was allocated to Social Security, then benefits would decrease; the same with defense and every other program. Furthermore, each member would have an actual record of how they felt their constituents wanted money to be used and that record could be easily reviewed, which makes voting decisions simpler in the next election cycle.
Additionally, programs with minimal support would die a natural death without forcing a majority of members to vote against them. Also, this would allow for a more nimble federal budget as it would be completely reallocated on a yearly basis. Feel we should support electric cars? Encourage your representative to allocate $2 million of your district's money to electric car tax breaks. Disappointed that your fiscally conservative candidate did not appropriate any money toward paying down the debt? Vote them out. What happens if there's an emergency and we need to spend more than we generated this year? Require a 2/3rds majority to borrow from next year's allocation and then spend the money in the same way. In the case of the recent stimulus bill, that concept would have given each member of Congress the ability to spend (or save - by paying down debt) their district's percentage of the money we're borrowing.
This new way of allocating taxpayer's money would provide voters with significantly more transparency into what their representatives in Washington are doing and force legislators to actually make decisions annually about what money is spent on instead of hiding behind the status quo, both of which would be a welcome change. It may also be our best hope at staving off a California type crisis at the national level.
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