Cookie Jars

When I was a little kid, there was a cookie jar in my house, and Mom who baked excellent cookies.  I was a scrawny runt, and at that time a picky eater.  But when I got home from school I could have a snack, so long as it was not within an hour of dinner.  I remember a bowl of potato chips, and some cookies.  Maybe slicing up a banana with a little sugar and milk.  Or, sliced carrots with Italian dressing. Mmmmmm….

Anyway, we all know what we like.  Politicians know what they like as well.  They want to promise a lot, and not tax much.  That has problems, because over the long run, budgets must be balanced, unless you want to live in Fantasyland.

Maybe Disney needs to take lessons from the governments of the US, because they live in Fantasyland now.  Ask yourself this: what governmental entity of any size has their budget balanced on an accrual basis?

  • Are retiree benefits fully funded? (pension & healthcare)
  • Are the rainy day funds funded?
  • Are the “trust funds” funded, and not raided?

The list goes on.  Often local, state, and federal governments raid the value of assets meant to fund future expenditures in order to fund current spending needs.  Most famously, the trust funds for Social Security and Medicare hold non-marketable debts of the US Government.  There is nothing behind Social Security aside from the taxation power of the US Government.  Same for the military and old DB [Defined Benefit] plans for US Government employees.

The money has been spent, and the payment of future benefits relies only on future taxation.  But lest you blame the Federal Government overmuch, the states and municipalities aren’t much better.

I’m relatively certain that most states and municipalities have to balance their budgets on a cash basis, not an accrual basis.  Another way of saying this is if there is a dollar left in the till, on a cash basis, the budget is balanced, no matter what future promises remain to be paid, with no assets to back up the promises.

We would never let insurance companies or banks be run in such a manner, but we let governments slide because of their taxation authority.  When the time comes to raise taxes, how well will that be received?  When the time comes to reduce benefits, even those being paid  now, how will that be received?

I don’t see how this works out.  I believe in pre-funding future obligations.  Practically, our governments believe in raiding cookie jars until there are no more cookies left, and maybe, some anti-cookies.

Government finance will be rough for the next 30+ years.  It could have been a lot easier if governments had decide to pre-fund, and not raid the assets.