Friday, January 8, 2010

The Law and the Profits, Part 3

Still in chapter 1.

Professor Parkinson relates the general process of government budgeting: The civil servants create the budgets in such a way that the previous year's dollars are adjusted for inflation, and then a percentage is added for good measure. These values trickle up to the Treasury, at which point revenues are allocated to meet budgetary demand. The legislature plays a role in the authorization and allocation, but if the system of accounts is not robust (as it was in Britain despite major reform efforts in 1666, 1689, 1826-29, and 1904), then the legislatures role is practically limited.

The United States federal government has spent many years attempting to improve its system of accounts, yet after so long still regularly fails to modernize and make reliable the financial systems at key departments. (See the Financial Report of the United States, past and current, specifically the auditor's reports.) Having read the U.S. financial reports for nearly a decade, it is clear that progress is being made. Nevertheless, politics interferes with budgeting reform. A fascinating paper by Theresa Kohler of Virginia Tech examines some of the major problems of legislative involvement in budgeting, and reviews some concepts for improvement. A list of recommendations from the Heritage Foundation identifies seven steps for current budget reform. Parkinson has his own suggestion for reform, which is stated simply: "Ministers should not begin by ascertaining what the departments need. They should begin by asking what the country can afford to spend." This is after all the basis for household and business budgeting; why not the government as well? More in part 4.

The U.S. is a long way from the Britain of Parkinson's time (1957), and yet we are still very close in many ways. He states, "The accepted principle is that new expenditure is watched by the Treasury, old expenditure by the departments themselves." In the U.S., most budgeting is done by incremental changes to the baseline, which is determined by the departments. New allocations are an amalgam of legislative and departmental desire. There is so much happening in the federal budget that the 535 people who are our representatives cannot know what is going on in any significant detail. Therefore, they must deal in "deltas" from baseline, allowing what presently is spent to continue to be spent. This is the reason that few government programs are ever ended despite the clear end (successful or not) of their mission. It is simply too difficult to identify these living-dead programs and to end them. Now, in modern times, using the internet as a tool, some efforts to bring transparency to the federal budget are having the effect of allowing more citizens to review the budget and to make their voices heard concerning the waste. What remains to be seen is whether politicians will have the political fortitude to end the waste.

Parkinson writes concerning the watchdog,
"The ordinary taxpayer is often in a better position to know about waste in administration than either the politician or the journalist. For one thing, he may himself be employed in the [government program]. It is theoretically in his interest as well as his duty to come forward and denounce extravagance when he sees it. He does nothing of the kind, and that for two distinct reasons. In the first place, he stands to gain nothing but unpopularity and abuse, being likely to be regarded as at best a crank, at worst a spy. In the second place, he knows perfectly well that the money saved in one direction will certainly be wasted in another. Nothing he can do will reduce the tax he has to pay. So he wisely decides to say nothing and keep the good opinion of his neighbors. In matters of public expenditure no help is to be expected from the public at large unless the informant is personally rewarded and at the same time assured that all savings will go to the reduction of the taxes to which he is subject."

He did not foresee the internet, nor the rise of watchdog groups. He saw the heroic individual standing up for what is right in the face of "unpopularity and abuse." The watchdog groups still receive "unpopularity and abuse," but the effect is diluted and easier to individually bear. There is strength in numbers, and I must caution that not all interest groups are evil or self-interested.

Next time, how much taxation can a country afford, and what types of taxation are appropriate?

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