Three Pictures of the Federal Government

Picture 1 - The Myth

The picture of the government and trust funds implied by most political discussions is a myth. The funds are imagined as some sort of special entity separate from the government.

|------------------| |---------------| |------------|
|                  | |     Social    | |  Medicare  |
|  The Government  | |    Security   | |    Fund    |
|                  | |      Fund     | |            |
|                  | |    |     |    | |   |    |   |
|                  | |   /|\    |    | |  /|\   |   |
|   |     |    |   | |----|-----|----| |---|----|---|
|  /|\   /|\   |   |      |     |          |    |
|---|-----|----|---|      |    \|/         |   \|/
    |     |    |          |     |          |    |
    |     |   \|/        Tax   Pay        Tax  Pay
  Taxes Bonds  |
          Expenditures

Picture 2 - The Reality

The reality is quite different from the myth used by politicians to confuse the electorate and by special interest axe-grinders to mislead the politicians.

     |---------------------------------|
     |                                 |
     |         The Government          |
     |                                 |
     |                                 |
     |                                 |
     |    |         |          |       |
     |   /|\       /|\         |       |
     |----|---------|----------|-------|
          |         |          |
          |         |         \|/
        Taxes   Borrowing      |
      (payroll) (domestic)  Expenditures
      (income)  (foreign)    (expenses)
                            (capital)
                            (transfer)

The reality is that there is but one government. That one government has-taken on certain contractual obligations, such as Social Security. The so-called "funds" are not trust funds in the private sense.

Private trust funds must be kept in separate accounts, not mixed with the trustee's account, and invested prudently. But the "funds" of the government are nothing but paper records. The money is not only mixed with other Treasury accounts, it is in fact immediately spent. There is no store of wealth held by a trustee in a fund account. There is only a notation that the tax money was collected and is gone. What remains is the contractual obligation to make certain future payments.

These contractual obligations may be adjusted unilaterally by the federal government at will. They are obligations in the political sense. What must be understood is that they are not subject to the contents of a so-called fund. Bankruptcy of the "funds" is not meaningful* (see reference at end). The threat of bankruptcy is nothing more than a political weapon used by scoundrels for their own frightful purposes.

Picture 3 - As It Should Be

Clarity of public understanding would be greatly enhanced if the accounts, and even the physical structure of the government, were divided into three distinct parts: Expenses, Capital, and Transfer. To better describe their functions they are here called Operations, Growth, and Equity.

               wall              wall
 |--------------| ----------------| ---------------|
 |              |                 |                |
 |  Operations  |     Growth      |      Equity    |
 |              |                 |                |
 |              |                 |                |
 |              |                 |                |
 |   |          |    |            |    |      |    |
 |  /|\    |    |   /|\     |     |   /|\     |    |
 |---|-----|----|----|------|-----|----|------|----|
     |     |    |    |      |     |    |      |
     |     |    |    |      |     |    |      |
     |    \|/   |  Bonds   \|/    |   Taxes  \|/
   Taxes   |    |           |     |           |
       Expenses |    Construction |   Sharing & Need
                |   & Replacement |
                |of Infrastructure|
 BUDGETS:       |                 |
   Operations   |  Growth Budget  |    Equity Budget

The government ought to be viewed as one entity, but with its accounts separated by their nature. Businesses keep separate their short-term expenses and their long-term capital investments. State and local governments sell bonds for specific capital investments and to that degree make the separation. The federal government, for the advantages perceived by politicians, has mixed its accounts. This results in confusion in the public mind. In particular, the government expenditures seem much larger and to be growing much faster than is real. The argument that the government is "crowding out" private investment is invariably based on quoting figures for the total revenues or expenditures of the government. In fact, of course, much of those expenditures are for building and maintaining the necessary infrastructure or are transfers from some people to other people. Such transfers take no net money from the private sector and have only secondary effects on private investment.

For many people a bitter pill to swallow, the Equity Budget makes visible what has always been there. This is where corporations go for subsidies and rescue loans, where those who benefit most from the system pay a greater share, where those who are in need come for help. It is, if you wish, the religious budget where the commands of all great religions to care for the needy and share the riches of the earth are obeyed. Or, if you prefer, where the rich take precautions to avoid the revolutionary guillotine. And where the business managers sustain their labor pool during times when they cannot all be employed. It is where the too old and the too young, the too crippled and the too ill are cared for; and those improverished by some malfunction of the system are helped to survive, at least for a time.

The Equity Budget is also where tax money is distributed among the States according to their need -- but weighted according to the committee chairmanships of their congressmen. Equality among the States is, in some instances, required by the Equal Protection mandates of the U.S. Constitution.

The Expense and Capital budgets should be based, insofar as possible on the principle of payments from those who benefit. Exactness is impossible in this, but the principle is sound. It has long been believed that all benefit from certain functions of government such as defense, education, police, courts, resource and environment protection, fire departments, highways, and airways.

The separation of Expense and Capital is, to a degree, arbitrary. Should education be regarded as a capital investment because the payment today is for improved human capital some years in the future? Is an army uniform expense or capital? As a general principle, applicable to any material, it depends on how long it will last.

A set of principles is needed and not too much quarrelling about the classification - a reasonable division will be far better than no division. Perfection must not be allowed as the mortal enemy of the good. This begs for a bi-partisan independent commission to design an imperfect but greatly improved system.