Download the President’s Proposed Budget for Fiscal Year 2012.

Last week, President Obama unveiled his proposed budget for Fiscal Year 2012, which includes plans to trim $1.1 Trillion from the deficit over 10 years. But is it enough?

President Obama and the Proposed Budget 2012

Republicans say no, from a political perspective. However, from an economic perspective, it may just do the trick, at least to start. In truth, the deficit should be cut by five trillion dollars or more over the next five years, but the likelihood of such a massive action would be nearly impossible to achieve.

FY 2012 Budget CoverWhile cost cutting is critical, we must consider what costs are being cut. In some cases, many things the government spends hard cash for are no longer needed. One example is that we continue budgeting our military for the cold war, keeping troops in places like Germany, Japan and Korea, where the threat of communist actions are far less likely, and where alternatives, already budgeted and in place, could substitute for troop deployments which are far more costly.

Other programs that are long outdated continue to receive appropriations from Congress annually that could easily be trimmed or cut entirely. However, it’s traditional that once Congress begins an appropriation for a project, that usually continues unabated for years.

As one US Chamber official said “Washington is filled with buildings and projects that were ‘temporary’ since World War II, and not one has ever been taken down or stopped.” Perhaps the focus of budget talks with Congress should be the end of World War II. In case they hadn’t noticed, we won in 1945.

While Republicans claim that President Obama has tripled the deficit, and blame TARP spending on him, in truth, most of the deficit increase was the result of previous administrations, and TARP was proposed and enacted under George W. Bush. The American Recovery Act and other stimulus was enacted under President Obama, but much of the stimulus appropriations went unspent.

In what is clearly a bold political move for 2012, President Obama failed to address cuts in defense and Social Security/Medicare/Medicaid, compelling the Republicans to deal with that portion of the budget. Americans may complain about the deficit and the budget, but if you try to curtail their entitlements, they will reply at the ballot. Thus, the President is leaving it to Republicans to deliver bad news to Americans.

This budget only deals with non-defense discretionary spending, which is a small portion of the national cost of operations. The President did deal with medical costs in the Health Care Reform Act, but took a beating over it from both parties and an outraged American public. Leaving the next stage, cutting the budget in social programs to Republicans, is a strategic move, but his budget does fail to actually cut real costs.

Thirty percent of the nation’s budget goes to defense and military spending (DoD). Another 18 percent goes to pay for military retirees and costs associated with military personnel (VA). DoD receives $553 Billion for its base budget, an increase of $22 Billion above the 2010 budget, not including the cost of actions in Afghanistan and Iraq.

Some have argued that the key is to tax the rich more. A hyper-increased tax on millionaires will yield only a few billion dollars, which is merely a drop in the ocean compared to other spending. The cure here is to have government build the economy in a way that incentivizes the creation of jobs, and private investment in the economy. Presently, the deficit in part, suffers from the lack private of capital investment in small to mid-sized businesses that could create jobs, or restore them.

An Alternative View
There is, of course, a new concept not discussed by either party for the 2012 budget that should be considered as an economic stimulus program.

If the Treasury were to use TARP funds to invest directly in preferred shares of new companies that guarantee to create a specific number of jobs that are contracted with the government to be maintained for a period of five years or more, but no less, and federal corporate taxes are suspended for these new companies (not existing, not divisions of existing, and not reincorporations of previously existing entities), new jobs would be created and revenues to the Treasury would increase by the taxes collected from the employees (personal income) and from trade and commerce taxes, fees and interest paid back to the Treasury on the initial investment. In five years, the company would have to buy out the Treasury or face a 20% premium on regular taxes if they cannot buy out the Treasury held stock.

Each applicable government department should be required to review the proposals and business plans of companies seeking funding of projects above the cap for Small Business Administration guaranteed loans, reporting back to Treasury whether these projects are viable, fiscally responsible and in compliance with Federal law.

Companies would receive a letter of commitment from Treasury, requiring them to obtain matching funds for the first tranche in 120 days before that tranche is actually paid, reducing the risk of government funding in the new entity.

Once initially funded with a TARP guarantee or direct investment, the new entity will have to reach its planned objective for personnel. TARP funds would be released in tranches, so that the risk to the Federal government is minimized at each stage. Four tranches over five years would be appropriate. However, if any company fails to meet stated and agreed goals, all incentives would be immediately canceled, in writing, with premiums (as a penalty) imposed.

The effect would be a massive number of new companies hiring tens of millions of people, reducing the deficit considerably, cutting the unemployment rolls, and improving the tax base of states and municipalities around the nation. This concept is far more stimulative to the national economy, and better for deficit cutting than any concept floated by either political party to date.

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