The proposed federal budget was released this week and everyone was "shocked" to find that it contained more government spending than expected and a trillion dollar deficit. The fact is, this was easy to see coming over a year ago. There is simply no major constituency for cutting spending. And this being an election year, the number of politicians that would run on taking things away from people are even fewer and more far between than ever before.

Aside from the horrendous deficit there is one thing I like in the budget and that is that the infrastructure proposal returns the responsibility to the states and cities. It also cuts the time for permits to two years, and basically gets the federal government out of the way. It proposes eliminating 80% of the agencies down to one agency thereby cutting bureaucratic red tape. It is a major move toward returning state control and reducing federal control. We need to remember that this is the United STATES of America -- not the Federal Government of America. States need their independence and need to assume their own responsibilities.

Someone argued that we can't return the responsibility of fixing roads and bridges to the states because some, like New Jersey, are broke! So tax payers in Oregon should pay for the repair of roads and bridges used by the citizens in New Jersey? That's the way it is today and it needs to stop! New Jersey and others like it need to fix their own problems at their own expense.

Next year congress will hopefully address the budget deficit. Inevitably, congress is going to have to tackle entitlements. Either they will do it -- or the markets will eventually do it for them. As interest rates rise, the cost of servicing the debt will soar. That will, over time, take away all of the money the government has to spend on social programs. The result is either defaulting on the national debt or cutting programs. There will be no choice. Today, we still have choices.

If it is a crisis we need to give the government spine -- so be it. But today we still have choices that will avoid a crisis. There are plenty of areas where we can cut. I suggest we cut entire agencies on the federal level that will help reduce the deficit. Many agencies are failing to do what they were set up to do. They only cost money and produce nothing except negative results. The Department of Education comes to mind. States and local cities can educate far more efficiently than a distant bureaucrat.

What we have is a political problem, not an economic problem. But we will have a major economic and monetary problem in the coming years if we refuse to acknowledge that we have a problem at all.

This year is the beginning of solving our problems such as anemic growth, but also the beginning of losing control of interest rates and inflation due to our out of control spending. The transition from lower growth and disinflation to higher growth and higher inflation is what is responsible for the wild market swings. What we're witnessing is a nation in transition.

I've heard all kinds of technical and fundamental analysis of why we're going through this market volatility. Here's another way of looking at it:

Markets are a product of nature. The more markets are free to pursue their nature, the truer the picture of what is happening in the real world we get. And the more controlled they are, the less visibility we get of the real world. This is why free markets lead to natural and progressive growth and controlled markets lead to stagnation. 

Markets approximate nature. Like life itself, they have stages. There are periods of adjustment. Many stages are awkward and confusing. Take a baby becoming a child. The transition is cumbersome. Then comes a child becoming a teenager -- a traumatic and confusing stage. And finally, a teenager becoming an adult. Another difficult transformation.

We have just come out of a child-like economy where our growth was limited for the last 9 years and are now shooting up in size and weight as we become a teenager. In other words, what is going on is natural. It is in the transition from stage to stage that we experience growing pains. Just as a teenager is confronted with new sensations that plays with his mind and emotions, the markets have booms and busts that are natural corrections and adjustments.

But the runaway entitlement programs we have instituted is not natural. It is like a cancer that is slowly eating away the healthy cells that allow growth. This "cancer" CAN be beat. It has been before. Reagan ushered in the largest deficits in American history when he cut taxes and increased defense spending. Many cried "crisis". But by the end of Reagan's eight year term, the deficits were substantially falling. And by the end of Bill Clinton's term, the budget was in balance. What happened?

The tax cuts spurred growth and growth led to greater tax receipts. The Republicans took over the Congress and between Newt Gingrich and Bill Clinton, two fiscal conservatives, they cut the growth of government spending for eight years. Clinton leveled out the pace of government spending to almost nothing. Every budget he proposed was only a tiny bit higher than the previous budget. Today Clinton would be kicked out of the Democratic Party for such "drastic" actions.

He also declared that the days of welfare and big government were over. That would have gotten him tarred and feathered and run out of Washington on a rail today. And the Gingrich Congress supported him and maintained that discipline. Today there are only a handful of politicians with that kind of discipline.

Because of the lack of political will to deal with the growing deficits today, we very well may need to go through a very nasty economic and financial crisis in the not too distant future -- most likely in the next decade -- unless we address the entitlement problem next year after the election.

Much will depend on who the American people choose to be in charge of the purse strings of this country. This next election may determine the direction of our economy for years to come. So choose wisely.

Paul Nathan
Paulnathan.biz