THE BLOG
02/28/2011 03:18 pm ET Updated May 25, 2011

Balancing the Budget, Looking for Simple Answers

Economists and politicians love turning simple issues into complex monsters by trying to convince you that basic logic is wrong. For example, the simple analogy between household and national budgets is much more accurate than most experts will admit. In both cases, you need to review what you make (revenue) and what you spend (costs).

For the household revenue, I can look at my paycheck. If I want to increase my revenue, I need to find a better paying job or take on more side jobs.

The household costs are more complicated since the costs are broken down into categories like housing, utilities, transportation, food and entertainment. In my case, rent makes up over half of my monthly expenses so if I want to cut costs, the choice is obvious. I can try negotiating with my landlord or move somewhere cheaper. My utilities and transportation expenses aren't major budget items and are not discretionary -- I need heat and electricity, and I must travel to work. My food budget could go down a little but it isn't the main place for saving money.

So what about the national budget? The math and logic are the same. The best way to balance the budget is to first review the revenue and costs.

On the revenue side, the government's revenue comes almost entirely from individual income taxes and social insurance with corporate taxes paying less than 10% of the bill. If the government wants to increase its revenue it needs to -- everyone breathe in deeply -- either raise taxes and/or collect taxes more efficiently. Tax revenue can be increased in many ways but never by reducing the marginal tax rate of the wealthiest -- that voodoo economics only helps bankers buy houses in the Caymen Islands. The fact that hedge fund managers pay 15% tax rates is another example of the government performing fiscal suicide. Additionally, the government has under-collected as much as $100 billion per year by enabling off-shore havens such as the one that allowed Goldman Sachs to pay an effective tax rate of 1%. The take-home point is that discussions about increasing the tax revenue must go beyond businesses looking for handouts, wealthy looking to stash money and politicians trying to fund re-election campaigns.

On the cost side, we need to seriously examine the current and projected expenditures. About $700 billion is spent annually on defense and foreign wars. This is more than twice 2001's expenditures and exceeds the total spent by the following countries combined: China, United Kingdom, France, Russian Federation, Germany, Japan, Saudi Arabia, Italy, India, South Korea, Brazil, Canada, Australia, Spain, Turkey and Israel. Companies profiting from this explosion in military spending like the Carlyle Group, Halliburton and DynCorps will continue to grease politician's pockets and blow smoke at the public that these expenditures are all necessary and appropriate. Besides these expenses, Social Security and Medicare expenses are going to continue to rise as America ages. Social Security is received by about 50 million Americans and it keeps about 40% of all Americans age 65 or older out of poverty. These programs aren't going away because many Americans like them -- they just don't like paying for them. Don't hope for dramatic efficiency gains to control the rising costs. The simplest answer is to increase the age of eligibility, which will reduce costs but will also significantly impact those anticipating payments who are unable to find work. Making the transition gradual will ease some of this pain.

To collect more revenue you need to go where the money is... and to cut costs you need to trim the big ticket items. Unfortunately, serious discussions about the budget and dramatic actions like the ones I suggested aren't going to raise re-election coffers or make politicians popular, meaning few elected officials will have the courage to push for these collective steps.