President Obama just signed extensions of tax rates and credits that were due to expire at the end of the year. Without the current rates extended, I believe the economy would once again return to GDP shrinking and additional jobs lost. However, this is only one part of the equation. To really get the economy moving and get the federal budget balanced, serious reforms need to be made.

First, I am a HUGE fan of Rep. Paul Ryan. Back in 2008, he introduced his Roadmap for America’s Future. In it, he proposes a number of reforms that will make Social Security and Medicare more sustainable in the long run, changes to tax structure that helps individuals keep more of their money, and modernizes health care to help those who are higher risk or uninsurable obtain coverage they need. Many economists from varying sides of political thought have analysed it, and even those who disagree with parts of it appreciate Rep. Ryan for putting out an idea instead of just “saying no.”

Next, we have to comb through government expenditures to find inefficiencies, waste, and duplication. And yes, that includes the Departments of Defense and Homeland Security. From FY 2008 to FY 2009 (2009 is still considered estimated), net expenditures increased from $2.98 trillion to $4 trillion. A large portion of this, over $700 billion, is under the header of Commerce and Housing Credit. Any idea what that is? But from FY 2009 (est) to FY 2010 (est), expenditures went down a little over $400 billion. Even with the reduction of expenditures of Commerce and Housing Credit, increased expenditures in other sectors of the government offset those reductions (source: GPO).  Although I didn’t see the level of detail I was hoping for, Congressional budget leaders need to begin looking at areas that can be cut.  And don’t let the “earmark” argument distract you.

The recent $1.2 trillion omnibus budget proposed but died in the Senate included roughly $10 billion in earmarks.  For those of you not good in math, that’s less than 1% of the whole budget.  That’s a mere drop in the bucket compared to the whole budget.

The federal expenditure budget should be constrained to BELOW inflation + GDP growth… and that includes Department of Defense and Homeland Security.  Under full GOP control (we’ll include FY 2001 – 2006), average increase in expenditures was 7% (excluding Social Security and Medicare).  Under Democrat control of Congress (FY 2007 – 2010 (est)), the average increase was 10% (excluding Social Security and Medicare).  And while they’re at it, Congress must look at selling assets that are really money pits, such as empty office space (unless it’s practical to rent it out).

And finally, we must create an economic atmosphere of stabilization and competition.  Regulations and taxes are two of many factors that either keep businesses from expanding or move operations offshore.  I’m not advocating complete revocation of federal regulations and taxation, but this country needs is sensible rules that encourage expansion and investment while protecting consumers and punishing those that break the law.  Do you think someone like Goldman Sachs really cares if they make $100 billion through unethical means but turn around and settle with the SEC for $100 million (without admitting or denying fault)?  NO! The SEC needs to put the gauntlet down and really punish those that break the law (a la death penalty).