A New Year's Resolution for Congress? Learn Basic Economics

In the spirit of the New Year's Resolutions that many people make, I thought I would offer some suggestions along those lines for Congress. Most people don't keep their resolutions for very long, and I don't expect Congress to be any different. But, on the slight chance that they will listen and follow through, here are the ideas I would love to see them adopt.

Congress should pass and follow a budget. Okay, they finally sort of did this about two weeks ago, but now they have to pass the appropriation bills and then stick to it. As people who keep household budgets know, sticking to the budget is generally more difficult than making a budget. So no adding things that were not in the deal, no financial emergencies, just stick to the budget.

On that note, budgets should include some money for contingencies (like natural disasters). This one does include some money for FEMA along those lines, but not all that much. Congress likes to keep that spending category low, figuring that nobody will object to helping out those in need after a disaster. However, Superstorm Sandy showed that tradition is changing and, unfortunately, disasters are not going away anytime soon. The Congressional Budget Office can give you the historical average spending by past Congresses on disasters. To budget that amount would be a good first step toward a more rational budget process.

Congress should give up future year offsets. Spending more money now and "offsetting" it with spending cuts eight or ten years in the future is not acceptable. It is, in fact, pretty much a Ponzi scheme. You spend $20 billion now, claim a $20 billion cut in ten years, and tell the public that you are not increasing spending. Of course, the cut in ten years is not binding and that spending will be restored, probably offset by another future cut that will never happen. Either do not raise spending or tell us the truth, but these silly future offsets need to go.

Everybody says they want to get rid of the waste and low priority budget items, but nobody does it. Do it. Republicans should go after waste with gusto, starting with their favorite, defense programs, to show good faith. Democrats should go after waste and fraud in entitlement programs in a similar fashion. If both parties did that, Republicans could get a better military for less money and Democrats could funnel more aid to those who are truly in need. Waste is taking money away from what Congress supposedly wants the money spent on. That should be enough to motivate Congress to root it out.

Fix entitlement programs now. Obviously entitlement reform is going to upset some people who will be mad at Congress for changing these programs. The good news is Congress cannot get more unpopular than it already is. Thus, Congress, this is your best chance. Let being hated liberate you to do difficult tasks.

Congress should understand that corporations do not pay taxes, their customers do. Phase out corporate income taxes. Replace the revenue by equalizing taxes for capital gains, dividends and interest with regular wage and salary income (or moving in that direction). By eliminating the double taxation, this could be revenue neutral while greatly enhancing business productivity and helping to keep jobs here in America.

With money tight right now, why is the American taxpayer paying the defense budget for half the world? If Congress is unwilling to pull our military out of many of these overseas bases, can we at least charge for the service we are providing?

Make retirement plans fully fund their commitments every year, preferably allowing defined contribution plans only, including Social Security. Neither government nor private sector employers appear trustworthy as far as keeping their promises to workers on deferred benefits. The only safe retirement plan is one where the money is in a personal account so it cannot disappear through a bankruptcy or legislative change.

Never borrow as much as you can, because then you might be caught maxed out and unable to borrow more when you really need the money. Congress (and the President) may think that the U.S. does not have a credit limit like ordinary people do, but there is one. We don't know exactly where the limit is, but finding out will be a nasty surprise that would be much better avoided.

Finally, Congress should resolve to remember that government spending does not create growth. The money you spend was taken from somebody else. You do not see the value of what would have resulted from the money if you had not taxed or borrowed it, but that missing production and consumption does have a value (what we economists call an opportunity cost). So remember that all government spending replaces some other valuable use for that same money. Therefore, please try to spend wisely and with hesitation. The money may seem free, but it is not.

If Congress could follow these simple principles, we would have a smaller, more efficient government. There would be more truth and transparency in what they do and government could do a better job at a smaller number of things. If Congress followed these rules, we would all have a very happy new year.