This is a guest post from US Senate Candidate Greg Leichty. Mr. Leichty is running for United States Senate in the 2014 Kentucky race.
The ultimate aim of budgeting for the federal government should be to aim balance the budget over the business cycle. It would be optimal for the federal government to run surpluses during periods of economic expansion and to run deficits in times of economic downturn.
Contrary to current practice, the appropriate time to cut government spending is during times of economic expansion. When the economy is growing significantly, expansive federal spending can contribute to inflation. Restraining and even cutting federal spending during a time of broad economic expansion can serve to keep the economy from overheating.
Also contrary to current practice, the absolute worst time to attempt to restrain federal spending is during a period of economic contraction. During such periods, we rely on stabilizers such as unemployment insurance to lessen the impact of the economic downturn on ordinary people. Public expenditures also serve to stimulate the economy without contributing to inflation. Indeed, the costs of goods (e.g., needed infrastructure) for the government during a downturn will on average be significantly less than the cost of similar goods during an economic upturn. In other words, buying needed infrastructure during economic downturns should save money.
The federal government should thus engage in long-term planning to make its practices rationally align with the ordinary business cycle. This can be done in several ways. First, needed infrastructure projects should be planned for well ahead of time. They should be vetted and plans put in place for deployment during the next significant recessionary period. Quick enactment of “shovel ready” projects would make the economic stimulus more timely, more rational and more productive. Current practice falls far short of this and frankly is haphazard and inefficient.
Economic should also be programmed according to a predetermined schedule. In particular, unemployment insurance during expansionary economic times should be set at the something like the standard 26 weeks (e.g. 3% growth & 5% unemployment). The duration of unemployment benefits, however, would be automatically programmed to go up or down according to a preset formula. As economic growth slows down and unemployment increases, the duration of unemployment insurance would also increase in duration as the normal period required for finding employment is significantly more difficult in recessionary periods. The government would preset the levels at which the duration of unemployment benefits would grow longer and return back to the base level. These levels would be set by a formula put in place by appropriate legislation. This would remove a significant source of uncertainty in the economy during recessionary periods. It would get us past the haphazard and improvisational negotiations of current political practice.
A similar stabilizer should be put in practice should be put in place to sustain employment in the public sector by state and local governments during a downturn. During an economic downturn, we continue to need teachers, firefighters, and police officers at pretty much the same level as during periods of economic expansion. Putting in place low-interest loans to be given to localities and states to sustain essential services would serve to significantly cushion both the economic and social effects of economic contraction. Such loans would become available for local governments to borrow when the appropriate indices were triggered (economic growth goes negative and unemployment rises above 6%). State and local governments would be contractually obligated to repay the loans in subsequent periods when economic expansion returns. This set of stabilizers would again significantly reduce the degree of economic uncertainty in economic contractions and would be more rational and systematic than our current system of episodic improvisational political haggling over these matters.
Most economists would agree that such principles are more rational than our current system of haphazardly improvising during each episode of economic contraction. Our Congress can perform much better than it does. It is time to demand that it does.