by Adam Levin
So, how do you do your household budgeting? Millions of us use QuickBooks or some variation thereof. For those who are technologically challenged (I was for years), yellow pads, composition books, copy paper, accounting journals, even index cards, are the medium of choice.
However different their materials may be, most consumers who keep a household budget without the aid of an accountant or bookkeeper use pretty much the same method. As a rule, even accountants and bookkeepers use the same method as those who scribble on scraps of paper.
We call it household budgeting—a simple, straightforward name for a simple, straightforward, sometimes painful process. Number crunchers, however, simply can’t resist giving things like this a much more complicated-sounding name.
[Article: The Silver Lining in the U.S. Debt Downgrade]
According to them, your household engages in what is now called “zero-based budgeting.” Simply put, you start at zero and go from there. If cash gets tight, you might reduce your line item for baseball game tickets from $1000 a year to only $500 or from $100 a month to $30. You can also add or eliminate line items with a simple stroke of the pen—maybe you can’t afford baseball tickets at all. Regardless of what you decide to do, one thing is certain—if you spent $1,000 on tickets last year and $1,000 again this year you didn’t cut your spending.
You also intuitively recognise that budgeting and spending is only meaningful across certain time periods. If you budget ahead, as you should, you might have budgeted $1,000 for tickets next year. But you wouldn’t have budgeted, under any circumstances, $1000 for baseball tickets in 2016. Why? Because you’re smart enough to recognise that there are too many unknowns. In five years, your 10-year-old might be bored with baseball; maybe there will be a strike in 2016 (it seems like every minute players in some league are walking out and owners are locking them out); maybe—no, certainly—ticket prices will have changed by then. And, of course, it’s in the back of your mind that you might be making less money in 2016, though perhaps you’ll be making a lot more. Heck, maybe you’ll win the lottery.
All of this makes sense, doesn’t it? Unfortunately the way you, and most members of the human race think about money—the way that corporations, even very large ones, think about money—is NOT the way the United States government thinks about money (i.e., your money).
The federal government uses “baseline budgeting,” as mandated by the Congressional Budget Act of 1974. Here is how baseline budgeting is defined in current law: “For any budget year, the baseline refers to a projection of current-year levels of new budget authority, outlays, revenues, and the surplus or deficit into the budget year and the out-years based on laws enacted through the applicable date.” And you thought credit card and mortgage contracts were indecipherable?
Here’s what that means in plain English. Each year, instead of starting at zero, the government begins budgeting based on what they spend the previous year, with projected increases over time. Therefore, there’s no place to go but up.
And here’s the real kicker: originally, the mandate was to use baseline budgeting for a projected period of five years, but soon after the passage of the 1974 Act, that legislatively-mandated period was extended to a 10-year projection.
This is voodoo economics at its best: the Congressional Budget Office “CBO” baseline projects a spending increase for the federal government of approximately $9.5 trillion over the next 10 years. Thus, through the magic of baseline budgeting, an increase in federal expenditures of only $7.5 trillion over the same period would be characterised as a budget CUT of $2 trillion! That’s right, in 2021, even if we were spending $7.5 trillion more than we are today, we would all be celebrating the “significant” budget cuts that were made in 2011. A “non-cut” cut!
[Featured Product: Looking for credit cards for good credit?]
What would happen if you ran your household budget that way? It would mean that if you spent $1,000 on baseball tickets this year, you’d assume that the next year you’d spend maybe $1,100, regardless of your financial situation. And, if you decided to only spend $1,075 the next, you could pat yourself on the back for “cutting” your budget. Except we all know that in reality, you’re actually spending more than the previous year. That’s insane, right?
Perhaps worse than the impact of baseline budgeting is the period of 10 years that is the current vernacular of budget-speak. Ask any business person you know how far out he or she projects revenue and expenses. I asked two good friends of mine, one of whom had been the founder and CEO of a New York Stock Exchange listed company and other had been the President of a sizable regional bank (that was gobbled up by a larger institution that was inhaled by yet a larger institution that was swallowed by an even larger institution that bought an equally large institution and changed its name during the heyday of the bank consolidation craze and then collapsed during the great financial ‘Smores melt of 2008). The question was whether or not they found 10-year projections to be at all useful in running their businesses.
They both just laughed; so should you—unless it makes you cry. Even Mao didn’t have the cheek to plan his economy more than five years ahead.
Here’s something else that you probably don’t know, and neither did I until very recently: according to the Harvard Law School budget policy seminar, 10-year baseline projections are not intended to be precise. In fact, they can’t be… because baseline budgets are projections and actual budgets change every year. As is intuitively obvious, baseline budgeting itself assumes that everything is OK, and thus no major restructuring is required.
So what should we assume when we hear politicians from both sides of the aisle bloviating about historic cuts or necessary revenue increases? Everyone who talks about a cut is talking about a cut that might happen over the next 10 years, assuming we have no financially devastating terrorist attacks, mortgage crises or failing governments in Europe. And of course it’s not really a reduction in absolute terms. It’s only less than the growth in expenditures required by the baseline analysis. What I assume is that all of this rigmarole will have the effect—I hope not an intended effect—of making certain that most voters don’t really understand what the hell is going on in Washington when it comes to money.
Obviously, the federal budget and the CBO budgeting procedures are complex subjects. No doubt, any brief discussion of them is inherently unfair. Nonetheless, I firmly believe that baseline budgeting and 10-year projections need to go the way of the eight track tape deck before we can understand, much less solve, the really pressing issues created by budget deficits and credit downgrades. It’s a complicated problem. The current federal budget is 2,403 pages long. I understand that we live in a big, complicated country, with lots of obligations, but that’s only slightly shorter than the latest Webster’s Unabridged Dictionary, which is 2,783 pages and contains almost every English word ever spoken. Thankfully, the budget is quite a bit shorter than the U.S. tax code, which is currently clocking in at about 70,000 pages.
Paddy Chayefsky said it best in his brilliant script for the movie “Network.” Like the ones most of us remember, these words too are spoken by Peter Finch playing Howard Beale, a once-respected network news anchor:
“I don’t have to tell you things are bad. Everybody knows things are bad. It’s a Depression. Everybody’s out of work or scared of losing their job. The dollar buys a nickel’s worth, banks are going bust…We know things are bad— worse than bad. They’re crazy. “
That was written in 1974.