For the past couple of decades, US budgets have been prepared on a 10-year basis. The Congressional Budget Office scores the 10-year deficit, while the sustainability of Social Security and other entitlement programs is calculated on the basis of their deficit projected 75 years ahead.
Politicians have learned to game this system, inventing new programs that spend money up-front, with supposed vast savings later in the decade - which of course never materialize.
The reality is that money a decade or two ahead is worth far less than money today because the electoral process can intervene
and cause it to disappear. Ordinary business discount rates are hopelessly unrealistic, especially at current low interest rates. I therefore propose herein a new formula, a political discount rate, for public-sector budgeting.
There are two factors involved when looking at a projection of public sector income and expenses. One is the cost of money, which for the public sector is effectively the Treasury bond rate, perhaps that for 10 years when a 10-year projection is being considered (or somewhere just under 3% per annum today). The other is the uncertainty in political projections, because presidential elections every four years and, to a lesser extent, Congressional elections every two years make future cash flows very uncertain.
The nature of elected government means long-term plans for policy or spending are futile. There is simply too much uncertainty about the world beyond the next election for such plans to be meaningful. For example, if Mitt Romney had won in 2012 (his defeat feels inevitable now, but didn't then) then the Obamacare legislation would have been effectively repealed, one way or another. Equally, if Al Gore had beaten George W Bush in 2000, then we probably would not have had the Iraq war (even though we would almost certainly still have had the 9/11 attacks), and the Republican who would probably have been elected in 2008 might have corrected any overspending follies that a Gore presidency would have brought us.
Not only the budget trajectory, but the world's entire economic trajectory, would today be very different. More ...
Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.
(Republished with permission from PrudentBear.com. Copyright 2005-14 David W Tice & Associates.)