Carrots and sticks

Carrots and sticks. Incentives and consequences. It’s what gets people to act. It’s what makes the world go around.

When Pennsylvania’s new governor, Josh Shapiro, discovered that state agencies were stifling business growth by sitting on permit applications for months, sometimes years, he flipped the script. He ordered every agency to set new deadlines for issuing permits. He then set up a single centralized office to process applications. And then he started issuing refunds to businesses and individuals who didn’t receive their permits on time.

Permits are as big a revenue source for state agencies as they are essential for private businesses to operate. But with no incentive to approve them quickly – and no consequences for foot-dragging – permit applications got swallowed in the bureaucratic quagmire.

Yet within six months of implementing the new policy, Pennsylvania’s backlog of permit applications had magically disappeared without a single refund having to be issued. By threatening to starve the sluggish, inefficient machine, the new governor brought it back to life.

Warren Buffett once said he could solve the nation’s budget deficit in five minutes: “You just pass a law that says that any time there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.” Incentives and consequences. Carrots and sticks.

Here’s another idea. The budget proposal President Biden recently sent to Congress calls for $7.3 trillion of government in the 2025 fiscal year. There are a little more than 131 million households in the United States, so if Congress passed a law requiring each family to send in a check for, say, $55,000, we could pay for everything as we go each year. In case you’re wondering, median household income in the United States is less than $75,000 per year.

Okay, that takes care of the annual budget deficit, but what about all the money the government has borrowed? According to the Federal Reserve, total public debt is just over $34 trillion and climbing. Congress could simply require each family to contribute another $258,000 out of our savings, and we could pretty much wipe out that debt problem overnight.

Paying off the national debt would also wipe out about a quarter of the average American family’s net worth.

You’re smart enough to see the problem with Mr. Buffett’s carrot-and-stick approach to solving the deficit, as well as my tongue-in-cheek plan to switch to a pay-as-you-go system. Both would require Congress to pass laws forcing itself to do the responsible thing or go home. Politicians are incentivized by doing whatever it takes to get re-elected and maintain power, which probably doesn’t include asking us for more of our hard-earned money. And unlike with hard-working American families, there are few if any negative consequences associated with spending money you haven’t earned.

The pay-as-you-go approach would also require every American household to participate financially, to have some skin in the game regardless of income or net worth. But according to the Tax Policy Center, about 40% of households in the United States will pay no federal income tax at all this year. What kind of politician will they have an incentive to vote for?

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(Information sources: St. Louis Federal Reserve, Tax Policy Center, U.S. Census Bureau, USAFacts.org, CNBC, The Wall Street Journal)

Any opinions are those of Mike Brown and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.