How Scarcity and Choice Affect U.S. Federal Budget

Economics is the science of choice. Our daily economic behavior is based on making the most rational choice under the given circumstances. Whenever we buy or sell products and services, we weight the facts, process them and make a choice. The economics is a science that attempts to evaluate the data and provide the best possible information and knowledge, in order to perform the best possible choice. But the choice procedure has an important risk, the existence of scarcity. Scarcity often leads people, businesses and states to perform non optimal choices because of inability to choose what is needed and what is not. The fact that we live in an unreasonably consuming society is forcing the adoption of habits and cultural changes that promote irrational economic decisions.

The budget control is a process that is followed by any thinking creature on planet. The ants are saving food for the winter, the camels are saving water in their back for the hot days and even the kids are trying to think what are they going to spend their petty cash. The same logical process is followed from the smallest economy system, which is the individual and the household economy system, to the higher and highest forms of economic organizations, like multinational corporations and national governments. Governments each year plan their expenses based on their current financial status and the expected financial status of the near future. State budgets usually end with surpluses or deficits at the end of each year due to the complexity of the economy, the lack of accurate predictions and the appearance of unexpected incidents like natural disasters, wars and economic uncertainties.

Although the management of the federal budget is conducted by scientists and professionals, the final results do not really differ from the way any individual manages his or her own budget. The federal budget is affected by scarcity and irrational decisions that are based in inadequate information. Soros claims that individuals base their decisions on solid knowledge but rather on incomplete understanding of the reality that they are a part of (Soros, 2008).
The U.S. federal budged has faced problems during the last years. As Rubin states

Since 1998, budgeting reforms at the federal level have unraveled extensively. The budget process has become ad hoc, fragmented, and opaque, balance has been elusive, and the failure to prioritize has become endemic. One cause was the mismatch between the budget process in 1998, which was designed to eliminate deficits, and the emerging budgetary surpluses of that time. A second contributing factor was the desire to reduce taxes while expenditures were increasing as a result of wars and natural disasters. The consequences of this great unraveling include the failure to fund Medicare and Social Security adequately when the opportunity was presented, as well as threats to constitutional and democratic governance. Renewed reform may require greater transparency and a willingness to embarrass elected officials with iconic stories (Rubin, 2007, p.608).

Further on, Dr Rubin advocates that the U.S federal budget has gone from surpluses to deficits during 2000-2002 due to spending that was pushed mainly by 9/11 terrorist attacks and the actions related to this event, like the wars in Afghanistan and Iraq and by unexpected disasters like hurricanes. But, this cannot become an excuse for consecutive budget prediction failures as in most of these years these circumstances where known and could have been predicted.

But even though, unexpected circumstances are not the only reason of unbalanced budgets in the recent years. Another major reason is the inability of choice and scarcity. A federal budget is about managing the inputs and the outputs of the government money. But many times, the citizens of a state are unwilling to understand that the raise in government spending implies a raise in government income which in simple words means a raise in taxes. The citizen needs are constantly increasing in a way that the government cannot cover the increasing demand for services and goods. At this state, the attempt of the politicians to satisfy public opinion and service short term political interests leads to wrong choices for the long term, choices that will probably affect next administrations and next generations.

Obama's current administration has came to power in the middle of the worst economic uncertainty of the recent years. Obama's spending strategy effectiveness to encounter the economic crisis is still under dispute and it is in the center of big discussion. But the fact that the U.S. federal budget is leaded to a deficit again is indisputable. Estimations state a deficit of 9.3 trillions for 2009 (Zumbrun, 2009). At the same time that the American people are creating a huge dept in order to save their economy and mortgage their children future, the consumers of the national aid and the stimuli packages seem to be avaricious. A good example of this statement is the AIG retention plans. While AIG bailed out by the government four times since last September and received an aid of $182.5 billions, the company has planned $165 million in retention pay at Financial Products (Boston.com, 2009). Everyone understands the necessity of retaining the key staff of a company. But the unreasonable fact in this case is why should AIG pay additional retention bonus to the staff that almost led the company to bankruptcy. AIG is just a paradigm of the waste of public money. It is certain that other companies that received national aid have offered generous compensations to senior staff. These situations show that the inability of choice from the government side, which was not able to choose the most effective ways to support the economy, and the scarcity of the senior corporate staff, which is not willing to quit from its privileges even during ressecion periods contribute to another year with deficit .

In my personal opinion, another bad choice in the formation of the U.S. federal budget is the defence and military spending. During FY 2008, the U.S. government spent nearly $800 billion on defense and homeland security. (GAO, p .35) The U.S. defense budget (excluding spending for the wars in Iraq and Afghanistan, Homeland Security, and Veteran's Affairs) is around 4% of GDP(Eaglen, 2009). Personally, I agree with Barnley Frank's call for immediate reduction on defense spending. He stated that

"The math is compelling: if we do not make reductions approximating 25 percent of the military budget starting fairly soon, it will be impossible to continue to fund an adequate level of domestic activity even with a repeal of Bush's tax cuts for the very wealthy. I am working with a variety of thoughtful analysts to show how we can make very substantial cuts in the military budget without in any way diminishing the security we need...[American] well-being is far more endangered by a proposal for substantial reductions in Medicare, Social Security or other important domestic areas than it would be by canceling weapons systems that have no justification from any threat we are likely to face." (Barnes, 2009)

Federal budget problems are not a privilege of United States only. Budget deficits are a common issue in most countries of the world. Unfortunately, the short duration of administration periods encourage decisions that are driven by micropolitical interests than by long term economic plans. Politicians are mostly interested in satisfying short term public needs, in order to raise their popularity for the upcoming elections, than to implement strategic plans for long term prosperity and growth. This leads to situations like the current economic crisis which is a fine example of non rational choices and scarcity in economic decisions.

References

AIG staff called to explain bonus. (n.d.). Retrieved August 27, 2009, from Boston.com Web site: http://www.boston.com/‌business/‌articles/‌2009/‌03/‌27/‌aig_staff_called_to_explain_bonus/

Barney, F. (2009, February 11). Cut the Military Budget--II . Retrieved August 27, 2009, from The Nation Web site: http://www.thenation.com/‌doc/‌20090302/‌frank?rel=rightsideaccordian

Eaglen, M. (2009, March 23). USA: A 21st Century Maritime Posture for an Uncertain Future. Retrieved August 26, 2009, from http://www.defenseindustrydaily.com/‌USA-A-21st-Century-Maritime-Posture-for-an-Uncertain-Future-05342/

Financial Statements of the United States Government for the Years Ended September 30, 2008, and September 30, 2007 . (n.d.). Retrieved August 26, 2009, from U.S. Government Accountability Office (GAO) Web site: http://www.gao.gov/‌financial/‌fy2008/‌08stmt.pdf

George, S. (2008). The Next Parading For Financial Matters (A. Fillipatos, Trans.). Athens: Livanis.

Rubin, I. (2007, July/‌August). The Great Unraveling: Federal Budgeting, 1998-2006. Public Administration Review, 4(67), 608-617.

Zumbrun, J. (n.d.). The Next Bubble: Obama's Budget Deficit. Retrieved March 20, 2009, from Forbes Web site: http://www.forbes.com/‌2009/‌03/‌20/‌federal-budget-deficit-business-washington-budget.html