The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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In the previous post, I speculated that concerns about “big government” had less to do with size than with control. (Suggestion: Read that post, before reading this one.) Those who abhor big government face the difficult task deciding which federal initiatives to eliminate, for every federal expenditure benefits some group. Eliminating benefits neither is popular nor appropriate for a great nation. There may be a solution to that dilemma.

Many people equate big government with “Big Brother,” the dictator in the book “1984,” whose motto was, “Big Brother is watching you, “ and who controlled every aspect of people’s lives. I suggested the concerns about big government would be allayed, not by reducing the physical size of government, but rather by reducing its control over us. In the previous post, I had said:

Visualize a new nation, called “Freedom.” The Freedom federal government creates dollars, which on a per-capita basis, it distributes to each state, each county, each city and each person. There would be no federal, state or local taxes. The states, counties and cities would get all their money according to a formula, and spend the money they receive according to their local requirements. The people would spend the money according to their personal desires.

The solution to big government is not to do away with the services government provides, but rather to transfer responsibility for implementing those services to state and local governments, while the federal government continues to pay the bill.

Let’s say in year 1, the federal government were to give each state $2,500 per state resident, while transferring to each state $2,500 worth of financial obligations currently funded by the federal government. There would be no net effect on the federal deficit, but the states would take control over $2,500 per capita of funding now controlled by the federal government. This would have no effect on the federal deficit.

Assume, in addition, the government were to give each state an additional $1,500 per resident, which the states could use for debt reduction, tax reduction or for new initiatives, at each state’s option. This would increase the deficit $1,500 per capita. The U.S. has about 310 million people, so that $1,500 gift would total about $465 billion. The federal government estimates it will spend about $3.9 trillion in 2011, so that $465 billion would add a net of about 12% to the federal budget, bringing the federal budget up to $4.4 billion.

In year 2, assume the federal government were to transfer an additional $2,500 in per capita obligations to each state, while giving each state $5,000 ($2,500 to cover existing obligations and $2,500 for the additional obligations). Again, there is no net effect on the federal deficit. In addition the government again gives each state a gift of $1,500 per resident.

Assume the federal government continues to follow this procedure each year.

What does this accomplish? At the end of 10 years, the federal government will have transferred to the states control over nearly $8 trillion worth of federal spending. Further, depending on how the states decide use their annual $1,500 per resident gift, some can be debt-free, or tax-free or both.

The above example assumes a steady $1,500 per capita gift from the government. What if, instead, the government provided a steady 12% increase as a gift to the states. By the end of 10 years, the states would receive about $4,600 per resident. The table below shows the per capita debt, deficit and taxes for several states. You can judge how additional annual support from the federal government might affect these states.
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Fiscal year 2007; Debt Rank
All Figures are Per Capita
State Debt Rank
1 Massachusetts
2 Alaska 
3 Rhode Island
12 Illinois 
23 California 
48 Georgia 
49 Texas   
50 Tennessee 

(Source: Center on Budget
Policy Priorities)
Debt –|– Deficit
$10,546 -|- $1,171
$ 9,630 -|- 0
$ 7,944 -|- 428
$ 4,256 -|- $543
$ 3,151 -|- $922
$ 1,204 -|- 320
$ 1,011 -|- 144
$ 677 -|- 161

State Tax Collections Per Capita Rank
(Tax Foundation)
1 Alaska $12,295
11 Massachusetts $3,359
12 California $3,224
25 Illinois $2,489
45 Georgia $1,891
47 Texas $1,856
46 Tennessee $1,859


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Each state would acquire the option to eliminate its deficit, reduce its taxes, reduce its debt and/or create new state initiatives for the benefit of its citizens.

In summary:
-The above approach could reduce the power of “big government” to rule our lives, since “small government” would acquire the finances to assume many big government initiatives.
-States could become healthier financially, while providing more services to their citizens.
-Any reduction in state debt would reduce states’ interest cost, thereby speeding the elimination of debt, reduction of taxes and increase in citizens’ money ownership.
-Any reduction in state taxes would add to the dollars owned by the private sector, increase each state’s GDP, reduce unemployment and increase each state’s average standard of living.
-The federal government, being Monetarily Sovereign, has the money-creating, legal power to support any additional per capita spending, subject only to inflation. The deficit increases are well within the levels of previous, non-inflationary deficit increases, so are unlikely to cause inflation, which in any event can be prevented/cured via interest rate control.

This would mark the end of big government control, while not giving up the benefits of federal spending.

One caveat: Every state has different financial circumstances, different needs and different spending philosophies. So transferring each federal obligation to each state, will not affect the states identically.

Comments?

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity, nor grow without money growth.